La Zona Impacta

My Spanish is not very good, but I think my made up phrase is a good way to describe what has happened to the volatility in the indexes this week.  Loosely translated, “La Zona Impacta” means The Impact Zone.  That is the only way to describe the breath taking fall in IV over the last 3 trading days.  A rock falling through a wet napkin would be another way to describe it, as the VIX fell from 21.5 to below 17.

 A couple things on this fall to take into account:

The IV looks a little cheap, because we lose a day due to the 4^th of July holiday, so the market makers are taking out the theta leaving the IV buried.

The European Summit is over, and it looks like Spain won’t have to finance in the market any more.  The Germans might mutualize the debt for the sake of the Euro.  We will see in 6 months, at least.

The trip from 1400 SPX to 1300 was jobs and Euro Implosion.  The former looks the same and the latter might not implode.  Situation normal.

The realized volatility on a short term basis is pretty stiff for the SPX.  None of the Iron Butterflies have paid over the last 5 days or so from the gamma wiping out the theta and volatility collapse.  Note the expensive white line versus red line below.

The Trade

La Zona Impacta is the VIX once it hits 25 on the downside, as it cruises to 16 or so.  The Summit, weekend, and holiday has made for an accelerated IV crush in the short term.   I think it is almost over sold at this point (remember nothing is fixed) and look at the SPY to buy some delta neutral juice on a two week duration or lower.  I bet you sell it for more than you paid for it.

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