Thursday, April 24, 2008

Implied Volatility Suggests Risk in Financials at Six Month Low

Just yesterday, in Financials Struggle to Establish Momentum, I expressed some concern that the recent relatively weak performance of the financial sector (XLF) did not bode well for any sustainable bull moves. Perhaps the sector overheard me, as today the XLF is up 2% in an otherwise flat market as I type this.

While the price action is ultimately what matters most, there is more to the story than just the prices of the financial stocks. In particular, I am watching the implied volatility of XLF, the financial sector’s bellwether ETF. As depicted in the chart below, the implied volatility (which has a significant fear and anxiety component in it) for XLF is approaching levels not seen since the first week in November.

I consider option traders to be a fairly savvy bunch; if they think that the risk premium in the financial sector is lower than any time in the past six months, I am going to listen – and watch to see what happens to the price.

3 comments:

Anonymous said...

Hi,

which computer program do you use that generates the vix info?

Bill Luby said...

Hi anon,

I get my VIX info directly from the exchanges and dump it into Excel. During the day, I watch it on several trading platforms/brokers, as well as via QuoteTracker and StockCharts.com.

In the event you are referring to the implied volatility chart above, that comes from the ISE web site: ISE volatility chart

I hope this helps.

-Bill

Eric said...

This is interesting because the LIBOR-OIS spread has been widening, more money is being pumped into the TAF, and the TAF rate this week was 82 basis points above the Fed's target minimum rate. Banks are paying a lot of money to borrow-lend between each other and the Fed.

The banks seem to be a bit more worried than the XLF options traders. Think I'll side with the banks this time.

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