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VIX is having bouts of self-doubt about halfway through the day the last couple of days.  The 13 handle is acting like kryptonite which repels all VIX declines.  The SPX is in such lofty territory that any pullback is taken as a sign of worry.

LivevolX (r)

Then the inevitable happens and VIX fails to hold the rally in volatility.  Why?  Because the SPX is not moving and realized volatility is in the dustbin. VIX near term futures are pricing a pullback in stocks that has yet to materialize.  Some sort of volatility product trade should make sense or maybe some short gamma.

The Lesson

Volatility tends to trade in a Newtonian fashion meaning “A body in motion tends to stay in motion.”  While this is loosely paraphrased, the trend in realized volatility is a trend until a force comes in to unsettle it.  The market is pricing a force that has yet to materialize and it might not through the Mar cycle.

The Trade

We like selling gamma in the indexes.  Shorter term long time spreads should work ok when the VIX gets creamed intraday.  Place a put spread just OTM.

Disclosure: Index and Vol product positions

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