After 35 years of brokerage for some of Australia’s and the UK’s biggest houses and investors, the Secret Broker regales Stockhead readers with his colorful war stories – from the trading floor to the dealer’s desk.
When winter sets in, Mrs. Broker always grabs a jar of Vicks and rubs it over everyone’s chest, back, and soles of their feet.
According to her grandmother, it wards off any approaching “flu symptoms”.
When the kids aren’t there, I always ask her if it’s possible to get a massage tonight, before she tucks me in.
This cheeky request would come, after my grandfather’s remedy of (a bit too much) “hot toddies”, which consist of hot water, a squeeze of lemon, a spoonful of honey and a glass heavy with my best single malt.
At least one of us is laughing because of the winter blues setting in. After all, I am the one who cuts and stacks the wood for the fireplace, while everyone is comfortable inside.
However, when the cold winds approach the old wallet, I also reach for the Vicks, but this time it is spelled VIX. She rummages through the medicine cabinet, I rummage through the ASX website to find their version of the VIX.
The ASX VIX is their “Volatility Index” and it gives you an indication of how things are going in the land of the ASX. I always reach for it when I feel a sniff coming from the wallet.
For example, on Thursday of this week, the S&P/ASX200 fell 101.40 points to 7,019.70, a drop of 1.42%.
In the previous five days, the index managed to lose 2.18% and at that time was just 3.87% above its 52-week low.
By formulating these movements into a “volatility index”, it allows calculation and study to see if portfolio sniffing becomes the “flu or God forbid, pneumonia or COVID”.
When the market goes down, the index goes up and the VIX is used to calculate the price of premiums to charge on stock options when they are quoted live.
Here is Thursday’s index movement captured as a % of that volatility:
Note that the 52 week low was 9.66%, when the market was 100% in good shape and doing very well and the 52 week high of 24.34% was when it caught pneumonia and COVID at the same time.
The percentage showing at 17.04% indicates how far it is from the average average of the ASX 200 over the previous 52 weeks.
At its 52-week high, the market was 24.34% off its 12-month average.
As a trader, if you quote options 30 days ahead, you take the 17.04% and multiply it by the square root of the time, which would be the square root of 1 in 12 (as in 12 months of year or 30 days).
In this example of 17.04%, calculating an option whose price is exhausted 30 days in advance would add an additional 4.7% to its time premium.
So, as a trader, you expect the ASX 200 to deviate +/- 4.7% from the average ASX 200 average for the year and take that into account.
If you dive deeper into the rabbit hole, the price of a 30-day call option may rise even though the price of the underlying stock hasn’t moved.
If you equated that to a house worth $1 million and a buyer wants a 30 day option from you at that price, you can charge them $4,700 for that 30 day fixed price period. .
Now, thanks to the idiots at the RBA, who were too slow to raise interest rates to fight inflation, the volatility they added to stock price movements was more than just COVID.
No matter how much Vicks Mrs Broker might rub in the market, the cold winds and airborne virus that come with those winds can no longer be mitigated.
The ASX 200 VIX is up 21% over the past five days, rising from 14% to 17.04%.
Share volumes of listed companies, such as CBA, more than doubled their normal daily average from 2.30pm on Tuesday when the RBA announced its belated interest rate hike.
ABC fell from $103.08 to $92.90 in just two days, FFS.
That’s a 10% down move and wipes $16 billion off its valuation.
In other words, the valuation of Australia’s largest bank fell 10% in two days.
This weekend, I’m off to Martin Place on behalf of everyone in Australia, with the biggest pot of Vicks I can find so I can scrub the RBA Governor’s underwear. He might have a real sense of the pain he’s inflicted on all of us.
Now I know how Basil felt after asking Mr. O’Reilly to make repairs to their hotel and against Sybil’s advice.
The Secret Broker can be found on Twitter here @SecretBrokerAU or by email at [email protected]
Do not hesitate to contact him with your best stock advice and ideas.