Before Starting, if you did not have a chance to read my two part piece on Toyota, I wrote for TheStreet.com, please read it:
Now onto the business at hand:
I think it is always interesting to evaluate how much the S&P 500 is really down or up relative to what the VIX is reading. Before doing this calculation I believe that IV did actually come in today, probably somewhat aggressively, however, I would be shocked it ATM IV is down more than 2%. Now let's do some math (all options are April):
Yesterday:
1260 IV: 24.2
Vega: 1.44
1275 IV: 23.3
Vega: 1.41
Today
1260 IV: 23.30%
Vega: 1.40
1275 IV: 22.40
Vega: 1.45
Net change in ATM implied volatility weighted for change in vega (again email me if you want this math): .91% that is all! The rest is mostly from change in the price as we moved up the curve. I briefly had the chance to take a look at the curve:
I did notice that the IV of the puts was in a touch more than it was relative to ATM IV. I also noticed that calls got plastered. When we rally, even if ATM and Put skew stay stable, the call portion of the curve can profoundly affect the VIX. That is likely the root cause. As we have seen in the past, when the VIX falls because of the call curve, and price of the underlying, those movements are far from anything a trader could use as an indicator.
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graph from: LiveVol
