While the SPX only sold off 1% today, and is off less than 2% from the recent top, the VIX is sounding the alarm. On October 22nd the SPX closed 2052, the VIX settled 14.45%. Today, the SPX settled 2078, the VIX closed 16.52%. Generally speaking when we see the VIX incrementally hitting higher levels relative to similar levels in the SPX that is NOT a great sign for the market. The VIX has actually been creeping higher since early last week and appears to be primed to react hard to any sell off....essentially the market is become very tired of this sell off.
Rally in Bank stocks say rate rise.
The one thing we rely on as traders is mean reversion. When IV has been somewhat low or somewhat high we look toward long term trends to set where IV should trade. In addition we also look at where the underlying has been trading in the immediate past to determine IV. Finally, we look at upcoming events. This is why I need someone to explain how TLT vol could be so low. In the chart below we can see 60,90,120, 180, and 360 HV, along with 30 day IV and of course 10 day HV (for the immediate past).
Banks could rally on the NFP number. VIX 15 is the new 12 for now.
One of the things we watch for most at Option Pit is VIX and SPX correlation. When the two correlate, something is up and/or developing. While the VIX is somewhat low relative to where its been recently, that doesn't mean one can throw out these correlations. Today, the SPX was up and the VIX was up and vol was firm all day.