Daily Brief - ☀️ Stock drop insurance is rising

TLDR: It’s been a rewarding year for stock market bulls so far. The S&P 500 Index’s 16% rally paid off handsomely for traders who bought in early (and generated lots of FOMO among the many who didn’t). But jitters abound.

One clear way to see this is to watch the cost of downside insurance. Below, you can see that in a chart that requires a little bit of explanation: it’s the ratio of the cost of insuring against a 10% drop vs. a 10% rise in the S&P 500. Currently, that ratio sits at 1.8 times over a 1-month horizon. Put differently, it costs 80% more to bet on a 10% move down vs. a 10% rally in SPY (“Spyders”), S&P 500 tracking ETF.

You’ll notice, however, that the ratio doesn’t seem to revert to 1 over time. It drops to 1.20-1.30 but broadly stays above 1. This is a good point to introduce another term: “volatility smile.”

In the most basic terms, the value of an option is determined by the underlying asset price, the strike price, the time left before the option’s expiration date, and the implied volatility of the underlying asset.

Although the price, strike, and time left before expiration are known variables at every point, the concept of implied volatility can be a little trickier to understand. When you have an asset with a greater expected volatility, there’s a greater probability that it will reach the strike price of your option. So generally, the higher the implied volatility, the higher the option price and vice versa.

The implied volatility levels are higher on strike prices that are further away from 100% or the at-the-money option. In standard lingo, options below 100% are puts and options above 100% calls.

Most of the time, the option skew resembles a “smile” as below.

Like with airplane crashes, or shark attacks, downside risk looms larger than it might actually be, statistically speaking. In case of option markets, the risk of equity prices falling is priced to be greater than upside potential. Put differently, markets will pay more for put options which increase in value when prices fall, than for call options, which increase in value when prices rise.

Anyway, enough digression: the TL;DR is that the jitters had abated for a while during the summer but they have come back over the last few days. Fair enough, September is statistically the worst month for the stock market by a good margin.

What's happening in the markets?

This section is powered by Open AI connected to TOGGLE AI

The upcoming week promises to be eventful in the US market, with a flurry of significant developments on the horizon.

Notably, we anticipate earnings reports from tech giants Oracle and Adobe, alongside crucial economic data releases like the Core PCE, Core PPI, and Retail Sales figures.

These data points will serve as a barometer for the state of the economy and likely influence the Federal Reserve's decision on further intervention. While the prevailing consensus suggests that interest rates will remain unchanged at the forthcoming FOMC meeting, the likelihood of a rate hike at November's FOMC session has been steadily growing.

On another front, Apple's highly anticipated event scheduled for Tuesday will unveil its latest product lineup, including the eagerly awaited iPhone 15. It's worth noting that, paradoxically, Apple's stock has occasionally experienced downward pressure in the week following an iPhone release, despite the excitement surrounding their innovations.

Finally, Thursday will mark the commencement of trading for ARM's long-awaited IPO, touted as the largest since 2021, promising significant market implications.

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Earnings Update: Casey's General Stores reports tonight

Rising operating expenses have been a concern for the company due to operating a greater number of stores and a rise in expenses related to same-store operations. Can sales keep up?

Discover how other companies could react post earnings with the help of TOGGLE's WhatIF Earnings tool.

Asset Spotlight: CVS Health's Trailing P/B at a recent low

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General Interest: Skynet gets another toy

Anduril is an interesting company. They have a cool Tolkien-inspired name. And they manufacture killer robots.

Recently, Anduril released a new autonomous killer drone: Fury. A high-performance, multi-mission “autonomous air vehicle” capable of pulling 9Gs at Mach 0.95 for a tiny fraction of the cost of similarly performant fighter craft.

It’s unmanned, which means fewer human pilots in harmed way.

So let’s get this straight:

• General artificial intelligence, check - at least, LLMs are the first step
• Killer machines, check - Anduril at the forefront, but “armed drones” are not a novelty anymore
• Humanoid robots, check - see Figure.ai or good ole Boston Robotics

It seems we have all the ingredients for the AI uprising. Read more here on Anduril’s own website.