As we discussed on Tuesday, VIX was not just pricing in the cliff, it was pricing in the non-farms that came out today. While the December contract really hasn't moved since then, the Cash Index has come in considerably. The curve closed the day basically back to normal contango, albeit a relatively flat contango.
What I find more interesting is how the weekly options have moved in SPY and SPX. The VIX is a 30 day index consisting of Dec and Jan options; prior to today, I was seeing an interesting phenomena, January was trading at a premium to December options (fiscal cliff, not surprising). What was interesting is that there was also a lot of demand for weekly options. Traders were trying to get their hands on Vega (Jan options) and Gamma (weekly options). Take a look at the structure at the close of today:
Livevol (R) www.livevol.com
Notice that not only is Jan vol back below 16%, but also weekly options were much lower today, and demand in those options was on the sell side, not the buy side. This combination points toward a slow week next week. It also points toward the debate of XMAS vs Cliff dominance. It appears traders are more afraid to be left holding the premium bag than to hedge against the cliff prior to Dec 24. I think this is a mistake; I am not buying that there wont be another major bid for premium in the next few weeks prior to Xmas. Remember, just because the market isn't moving now, doesn't mean it will stay that way.
There is some serious edge in owning premium still. We like taking advantage of order flow demand. We like spreading between mispriced months, long and short, to create edge across a portfolio. If the market is telling us to sell gamma next week, a SPY butterfly might also make sense. The Jan VIX spread still looks like a deal
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