Option Market Daily Recap

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Expectations for increased volatility edged into the market on Wednesday, though in general implied volatility for equities remained moderate to subdued. 

There was little economic news and no market-moving corporate headlines to speak of, leaving trading generally lackluster early in the day.  However, buying interest perked up in the afternoon and the major averages eventually posted notable gains on the day.  The Dow and the S&P 500 once again reached new record closing highs.

Implied volatility for the market as a whole, as represented by SPY - the S&P 500 tracking ETF - advanced 5.1% on the day.  The figure rose to 9.9, coming off a multi-month high set earlier in the week.  It remains within sight of a 52-week low of 8.6 reached in mid-August.

Seven of the nine main sector indicators also saw higher IV for the day. 

Healthcare led this advance, with comments from Donald Trump roiling the sector.  The XLV health ETF saw a 10.8% jump in its implied volatility during the day.  Meanwhile, it was also alone among the major sectors in posting a price decline for the day.  XLV's price was down -0.9% on the session.

Movement in healthcare and biotech stocks followed comments by President-elect Donald Trump, who vowed to lower drug prices as part of his Person Of The Year profile in Time Magazine.

"I'm going to bring down drug prices," Trump said. "I don't like what has happened with drug prices."

Theoretically, if the incoming administration makes it a priority to push down drug prices, this could provide a strong headwind for drug makers and biotech firms.  It's not necessary to go any further than Mylan (MYL) for an example.  The company faced scrutiny over its EpiPen pricing and saw its stock fall from levels just under $50 in August to a mark of about $34 now.

Still, until the Trump Administration takes over and begins setting up its regulatory priorities, it's impossible to know how likely a stringent clampdown would be.  Even if it becomes a goal for the White House, Trump would still need support of free-market Republicans in Congress for any legislation, which makes passage of a truly strict policy unlikely.  The injection of uncertainty pushed up implied volatility as traders in these stocks will now have to read the political environment more closely.

Outside of health, financial stocks saw the biggest rise in IV for the session.  For the XLF financial ETF, implied volatility was up 9.2%.  There was also a 5.9% rise for the XLY consumer cyclical ETF.  For the other major sector ETFs, the IV gain on the day was between 0.9% and 2.1%.

Of the major market segments, only technology and utilities showed declines.  The XLK technology ETF saw a slight -0.7% dip in implied volatility.  Utilities saw a -1.9 % decline in its implied volatility.  Utilities have been the only major sector with elevated IV lately, as the prospect of higher interest rates affect these dividend-heavy stocks.  Even in the utilities, though, IV has been drifting lower over the last few days.

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