On September 2nd, I wrote a piece entitled “Options Skews Are, Well, Skewed”. After outlining some of the basics behind options skew, particularly the propensity for options with below-market strikes to have higher implied volatilities than their above-market counterparts, I noted how the skews in certain leading tech stocks had become inverted. Traders had been bidding up the implied volatilities of out of the money calls above those of protective puts, implying that greed had outstripped the fear as the primary motivation for options traders in those names.
My conclusion at the time was: “Many clearly view the risk of missing an upside move (aka FOMO) as similar to, if not less than, the risk of a correction to market leading stocks, if not the market as a whole. That is a highly unusual circumstance, and it raises the possibility that markets will be difficult to navigate in the coming weeks.” That conclusion was particularly well-timed, as the S&P 500 Index (SPX) fell about 10% over the next three weeks after reaching a new all-time high that day.
So you may be thinking, “OK, even a stopped clock is right twice a day.” This piece is not about taking a victory lap. I have noticed the same conditions reemerging in leading tech stocks and want to alert readers to the likelihood that a similar speculative climax may be upon us.
First, we should check on the NASDAQ 100 Index since about 50% of its weight is comprised of leading mega-capitalized tech stocks. The lines show the implied volatilities at various levels of “moneyness” of one month options in different historical snapshots. The key lines here are the orange and magenta lines, since they represent the levels we see today compared to the level of 9/2. The other lines also provide useful comparisons, because we can see that the skew for NDX options is relatively consistent. There was a bit steeper skew 6 months ago, but we were emerging from the depths of the Covid-19 selloff that climaxed in late March.
While we see little of note in NDX, the picture changes when we look at its two biggest components. Apple (AAPL) has a major product event today, where investors widely expect details of a 5G iPhone 12. That drove the stock over 5% higher yesterday, and the list of most active options was dominated by calls expiring this Friday. Clearly that demonstrated enthusiasm for the event, and that enthusiasm was reflected in options skew:
Note the similarity between the current skew (orange) and the one we saw on 9/2 (magenta). The overall level of implied volatilities are much lower, but the shape of the curve is nearly identical. This is what we call a parallel shift in the curve. The general level of fear is lower, but the enthusiasm for upside calls relative to protective puts remains quite similar. It was concerning then, and remains so now. There is little room for disappointment for AAPL today.
We see similar risk tolerance in Amazon (AMZN). The skew is not significantly inverted, as it was three months ago, but it is as flat as it was six weeks ago. AMZN has displayed a flattish skew at various points in recent history, but the indifference for upside call premium versus downside put protection at present is striking. One can argue that protective puts have been a waste of money for much of this company’s existence, but the market still displays enthusiasm for speculative calls even after yesterday’s 4.5% rise. The motivation behind that jump was today’s return of Prime Day, an inventory clearance sale that the marketing geniuses at AMZN have turned into an event. The options market is telling us that speculators believe that Prime Day, along with the ensuing corporate earnings release and Election Day (all within the period encompassed in the one month options shown on the graph), will be at least a non-event for the company – if not another reason for a leg higher.
Various people commented to me how yesterday’s trading activity reminded them of the action we saw in late August into the beginning of September. The skews that we see in the options market certainly back up that claim. We will see over the coming sessions whether the outcome also echoes that period.
Last month’s article, with a more detailed explanation of skew: view it here.
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