(By Erik Kobayashi-Solomon)
During the past several weeks, we have been taking a look at what we could do to make our weekly Volatility Report more interesting and helpful to OptionInvestors. This week, we are test-driving a new format which will first summarize a few key points regarding the goings on of the week, followed by a series of graphs and commentary that we hope will bring these points home. I hope you like the new format and find it helpful and informative! Please let us know what you think. (Note that due to data availability issues, we are trying a Friday through Thursday report this time around.)
A few large moves in the equity and volatility markets early in the week were followed by an easing of volatility going into the release of the monthly employment report.
The average range of high and low prices for the S&P 500 was 70 basis points, with three days at that level or above. The day seeing the largest increase in volatility was Monday, when the VIX increased by more than 8%. Market pundits attributed this rise in the VIX to the a report announcing that purchases of new homes in February sank unexpectedly to the slowest pace on record and average prices dropped to the lowest levels since December 2003. OptionInvestors should know that implied volatility on single-name stock options in the Homebuilding industry actually fell by a percentage point and ended the five-day moving average for the industry ended this week at its yearly low. Those of you interested in getting bullish exposure to homebuilders should take note--now is a fine time to do that.
A more likely reason for the rise in the VIX on Monday had much more to do with macroeconomic uncertainty out of Europe (specifically Portugal's debt situation) and the Middle East (thanks to ongoing tension in Libya and a resilient Colonel Ghaddafi). The market's biggest rise (and largest range from low to high) was on Tuesday, when the market rose by 71 basis points. The VIX fell by more than 6% that day in response. We note that the volatility of volatility for single-name options is much lower than the volatility of the VIX, a trend that can be clearly seen in our graphs below.
The biggest fall in sector level volatility was in Financial Services and the biggest rise was in Communication Services
KeyCorp (KEY) and SunTrust Banks (STI) announced repayment of their TARP liabilities recently. Add to that the fact that embattled Citigroup (C) announced it would start paying a dividend again and Bank of America's (BAC) CEO stated that his firm was "much stronger today than it was a year ago." Please see Morningstar's Analyst Reports on each of these companies for further details.