VIX is Super Expensive

If I hear an option trader/option education student call this VIX low again, I might scream.  Here is why:

If I told you that over the last 9 trading days that the market had moved a total of 9 points, where would you expect the VIX to be?  Would it be 20, 15, or 10?  Well, if we consider that over a 9 day period that equates to volatility in the super low single digits, and that implied volatility typically sticks to 2-4 point premium, that would put the VIX below 10.

Well, we have had movement of 9 points in the market over the last 9 days:


Livevol (R)

So what does an average of 1 point a day of movement get you?  About a 3.5 point gain in the VIX!!!


Livevol (R)

The Spread between HV/IV is at one of the widest levels I have seen.  There are events that matter coming up though:

Tomorrow Ben Bernanke speaks in Jackson Hole, and while the potential for QE3 is important, when I look back at Fed announcements, they have not caused 30 day volatility amounting to the market moving more than 1%.  If anything, Fed announcements have led to less volatility.  Yet, we have traders buying LOTS of puts in SPX.    In the end, I think traders looking for Jackson Hole to be a big market mover will be disappointed.

Non-Farm Payrolls:  Next Friday, will matter, keep an eye out for this one.

European Action on 9/6 and 9/12:  Spanish Bond Auction, German high court.

The latter two I think are going to be far more important than the 1st. Yet, the 1st is the one getting the headlines.  With a long weekend coming up, I would keep a close eye on what is about to happen tomorrow.  As soon as the 'effect' of Big Ben is known, watch for the VIX to implode, possibly back to below 14.  It could get ugly for the long vol players, especially if we rally.

The Trade:

The weekly SPY or SPX butterfly expiring Friday is a layup, and when they list the new contract, that will likely be a sale as well.  Long VIX puts might also work.

BTW:  Our Short SPX, long GOOG from Monday's Blog was a homerun.

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