US Equities were mixed today with the Dow Jones, S&P 500 and Russell 2000 down slightly while the Nasdaq was higher. We’ve recently written about the volatility curve in the E-mini Nasdaq-100 options wherein we see elevated volatility in the options expiring tomorrow versus more deferred expirations. Certainly this makes some sense when one considers that Apple, Alphabet, Amazon and Facebook are all scheduled to release earnings reports after the cash equity market closes and the impact they could potentially have on Nasdaq index prices.
In other CME Group markets, WTI Crude Oil futures prices were down by nearly 3%, Gold and Silver were down slightly and US Treasury prices were higher throughout the yield curve, indicating even lower yields. In fact, the Ultra T-Bond, the closest CME Group futures product to the on-the-run 30-Year Cash Bond was up by about 2 points.
Revisiting the implied volatility in the E-mini Nasdaq-100 options that expire tomorrow, we wanted to provide a “real-life, real-money” example of the impact that the elevated implied volatility has on the price of options. To do that, we used the QuikStrike Spread Builder tool to analyze the at-the-money straddle in the E-mini Nasdaq-100 options expiring tomorrow. As you can see in the image below, when we plug in the current Call and Put volatility (48 and 47% respectively), we get a theoretical value of about 108 points in the Call and about 106 in the Put. In other words, the price of the straddle (buying one Call and one Put) is about 214 points or $4,280. Indeed, when we looked at the CME Group trading front-end, CME Direct, that is about where the straddle was trading as we headed into the cash market close (and earnings release).
After the cash equity market closed, between 3:00 and 3:30 Chicago time, all four firms reported earnings that were at least positive enough to lead to after-hours rallies in the price of their stock. As just before 4:00 PM Chicago time, we took another look at the same E-mini Nasdaq-100 option that expires tomorrow. The result provides us with a great lesson in event-driven implied volatility.
Remember, as you can see in the image below, prior to the earnings release, the at-the-money straddle (which was the 10,710 strike) was trading at about 214 points, or $4,280. After the uncertainty of the earnings release was removed from the market, the at-the-money straddle (which became the 10,890 strike after the underlying futures rallied) was trading at about 144 points, or $2,880 and implied volatility in the Calls and Puts had dropped to about 32.5% and 32% respectively.
Also, another good lesson in volatility exists in the move of the futures versus the price of the straddle before the earnings release. Heading into the cash market close, futures were trading at around 10,710 and then rallied to about 10,890 just before 4:00 Chicago time. So, even with the approximately 180 point rally in the futures price, if you’d paid 214 points on a speculative long position in the straddle, you still wouldn’t have covered your cost. Now, of course, the price could come down or continue to rise throughout the night and tomorrow, but it does provide a good example of how critical the need to pay attention to implied volatility is.