Today, in my column for TheStreet.com, I made mention of the fact that VXO, the original CBOE volatility index, was vastly outperforming the VIX. At day’s end that held fast, as the VXO gained almost double what VIX picked up today:
This suggests one important thing: concentration of buying in options was not far out of the money along the skew curve. It was taking place closer to ATM. This is a very important thing to notice, because it implies that traders are buying straddles near ATM protection or completely replicating a long position using options (or a short one for that matter). When traders are expecting a lot of movement in the near term, they typically buy more ATM options as opposed to protective puts. Basically, this points toward a pop in Realized volatility over the next couple of days...traders want gamma. Keep an eye out for next week. I think it’s going to be a cruddy one for those long stocks or short near the money premium.
My guess is that there were traders buying put spreads to not get long too much vega but to capture short delta. Put Spread buying will have the effect of causing the VXO to out perform VIX.
By the way, have you guys subscribed to expiring monthly yet? This month’s (September) is going to be all about the VIX. It’s a bit of a cant miss. Speaking of VIX, there is still time to sign up for my CBOE event? or sign up for 'A Trader's Guide to Volatility?'
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Graph from LiveVolPro
