Signal du Jour - long vol in the banks

Buying a few insurance, just in case.

Be careful what you wish for.
You think this market is boring? Yes, us too. Legend has it we even blew on our screens this morning, just to see if it would trigger some action. Spoiler: it did not. And we are right back where we’ve been for weeks—hovering at the watermark. Not quite positive on the year, not quite negative either.

In moments like this, everyone finds a lot of “smart” reasons to be long vol. Lately, the flood of doom-and-gloom articles on the US economy or debt is going exponential. Once again… be careful what you wish for.

Last week, we called a short vol on MRVL. Despite a rocky start, it's shaping up nicely. This week? Something different.

It’s not like us to call for a crash, but we have to admit—things are a little too quiet. So today, we’re exploring a long volatility play on a sector that got severely punished in March when macro fears were peaking, but which has gone dead silent in May.

Let’s go buy a few options.

The context

From –10% to +10% in five weeks.
We almost have a hard time getting excited about that anymore—despite the fact we’re talking about some of the largest banks in the US, and core pillars of global business.

Yet that’s exactly what JPM did earlier this year, and this level of realized volatility hadn’t been seen in a long time. Things have obviously cooled off since mid-May, as equity markets appear to have shifted regimes. But it’s fair to ask: how much longer can it really stay this quiet?

Although the effect of April were short lived, this was still by far the most disruptive event for the financials over the last 4 years.

Looking at the calendar, some important data drops tomorrow—and with the rhetoric around alternatives to the US market gaining traction, any new macro release that adds fuel to the fire could easily disrupt the slow snooze of recent weeks.

Once again, this is not a call for an April repeat. And while we remain somewhat skeptical of the “end of US exceptionalism” narrative, we do expect realized volatility to rise over the next few days—or at the very least, move higher from here.

We anticipate realized volatility to edge higher over the next few days and weeks.

We anticipate realized vol to drift closer to the 20% mark—at least 4 points above current levels—especially in the short term. With that in mind, let’s take a look at what the options market is pricing.