Realized volatility saw a significant increase yesterday, following a more than 1% gain in the market. This led to a rise in 10-, 20-, and 30-day volatility levels. Furthermore, the implied volatility unwind for S&P 500 components is set to begin today with two major companies, Alphabet and Tesla, reporting their earnings.
Alphabet and Tesla are expected to experience a plunge in implied volatility after their earnings events, which will contribute to the volatility dispersion trade in the market. This could lead to higher implied correlations as more companies release their earnings over the next few weeks.
Is Tesla Overly Bullish in the Market?
Tesla currently has a high IV of over 90%, with a significant amount of notional value on the call side for this week’s expiration date. This may not bode well for Tesla post-earnings, as call IV and premiums could see a decline. While the market was bearish on Tesla last quarter, it appears to be overly bullish this quarter.
Looking ahead, the market dynamics are expected to change with increased volatility. Earnings season is kicking off, and GDP data later in the week could introduce more uncertainty. The key question now is the state of the economy and whether corporate earnings will meet expectations or continue to stagnate around $240 to $242 per share.
The recent equity market rally was largely driven by multiple expansion based on earnings growth expectations. However, if earnings growth fails to materialize, the multiple expansion may not be justified, leading to a re-evaluation of risk. Second-quarter earnings will be crucial as they come beyond the mid-point of the year, potentially breaking the deadlock in 2024 earnings estimates.
Overall, understanding market volatility and its impact on investments is essential for navigating the ever-changing financial landscape. Stay informed, stay cautious, and be prepared for potential market shifts that could affect your financial future.