We have seen anticipation of future volatility evident in VIX trading products since actual volatility tapered off after the May 6 flash crash. But we have not seen much in individual names.
Options have fared considerably worse than the indices, but that may be about to change. The same group of high-flyers that led us up this summer has seen their stocks stall a bit and volatility start to percolate. Take Baidu, Inc. (NASDAQ: BIDU), for example.
Here is a look at the stock over the past three months:
First, let’s put the pullback in perspective. The stock lifted 50% in three months and has given back only about 5% off the top. But one thing does stand out, and that is the wider daily ranges. You can see that manifest itself on the volatility charts.
Here’s BIDU’s 10-day realized (historical) volatility over the same three-month stretch:
Ten-day realized volatility is a “noisy” number, as you can see, but even given that caveat, we’ve seen a large, steady spike from 25 to above 60.
And looking at BIDU options, you can see that traders believe the stock volatility lift may have some legs.
Here’s BIDU’s 30-day implied volatility (in yellow) alongside 20-day historical volatility (in blue) over the past three months:
So, what does this all mean?
Well, we do tend to see volatility spikes at turning points. And it’s not just BIDU. We’re seeing the same pattern, albeit not as extreme, in names like Apple Inc. (NASDAQ: AAPL), Netflix, Inc. (NASDAQ: NFLX), Priceline.com Incorporated (NASDAQ: PCLN) and assorted others that were 2010 market leaders.
The question, of course, is whether they’re leading us to a stalling of the upward move, or simply passing the reins to the next group of strong stocks.
There is no way to know for sure, but I would suggest that either way, this bodes well for options volatility in individual stocks.
Right now, correlation is extremely high, meaning stocks and options move in lockstep. That has made owning options in individual names a poor play, and it seems the market expects that to continue.
But if you believe the recent stock divergence and volatility spike of stocks like BIDU is telling you something, it’s a good time to fade those correlation assumptions by owning options paper in individual names. Maybe that means switching long stock into long calls, or perhaps adding some put hedges.
Follow Adam Warner on Twitter @agwarner.
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