Traders there are two very strange things going on in the option world right now.
1. The HV IV spread is insanely insane. With SPX IV trading at nearly 3X, realized volatility the market is pricing in options for a VERY big relative move in the near term.
Livevol (r) www.livevol.com
If we consider that, in order for the VIX to be this high and HV this low, expectations of a 1 or 2 day major realized vol spike must be the culprit.
This is further proven by our second strange thing, VIX term structure.
The current shape of VIX term structure, where forward IV is trading relatively low and at parity to cash points toward forward IV being fairly priced, right now and current IV expected to drop. This structure is really screwy and I think points toward a 1 or 2 day HV spike. Similar to what we saw after the presidential election.
We think that short term butterflies make a lot of sense, we also like short time spreads. We would be looking to short December options, go long January options through the cliff negotiations. In fact, a Jan-Feb time spread might be the trade of the year after Dec 25.
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