As we discussed on Friday, the VIX was still pointing toward more selling. Today, the same holds true. While the VIX is high, it is just now pricing in a 1.5% daily move for the next 30 days. That is less than the market has been moving the last few days though, and as the market falls, 30 ponits is becoming a bigger and bigger piece of the market pie, which should drive the VIX higher. Is the market in full capitulation? Probably not, a couple of major things point toward more selling:
The VIX curve. Desptie all the fear, the entire curve has not shifted. Traders are still pricing in a Christmas vol sell off.
Generally speaking, when the VIX is high, its a sale and when its low, its also a sale. However, there is one time where the expected pay out of selling VIX futures or options is not that great, when the VIX curve starts to do this:
Maybe it was the Europeans or maybe it was some jitters in China or Africa. The FOMC suddenly lost it zeal for raising rates. The economy here has been growing but not enough to satisfy our rate mandarins. Maybe it is the TWTR/FB world of instant gratification but it takes time to get off the QE band wagon. The Europeans are in the tougher boat of restructuring economies since they cannot borrow at the rate they used to so they can pay all the benefits. It does not look like Super Mario is going to finance that. Better to have slow or even growth from restructuring than souped up QE.
No it is not a tasty sandwich from the Potbelly shop close to the CBOE. It is a pattern we found in our chat room at the Option Pit. Yeah, Yeah I know you will say it is a “wedge’ but pox on that. It kind of reminds me of a sausage grinder. Meat goes in and sausage gets spit out. In fact one of our clients came up with that. VIX kept grinding with the SPY and doing nothing really.
Stocks looked ok today until Spain announced they have a case of Ebola in the country. It sounds like a non sequitur but a panic could be bad for mining, airlines and a host of other industries that operate in Africa and transport goods and people. Never mind that Ebola does not transfer from one person to another easily, but we are talking market sentiment here not rational behavior.
While the S&P may have closed unchanged, the VIX was down on the day. In fact, with the SPX down about 25 points over the last two days, the VIX is actually down .1 points. Also down VVIX, VXST, basically all indexes that look at near term insurance prices. Options were for sale today. Take a look at the tick chart from the last two days.
Another toxic brew for stocks today as equates drifted down around 1+% for the day. None of this was really attributable to the numbers. ADP was ok but the Ebola, HK, Russia, ISIS concoction of market sadness kept sentiment weak. Note how all the problems are more political than anything else. They need the will to solve them. This did drive IV up to some higher levels so those with some dry powder listen up.
Normally I would not do this. At Option Pit we pride ourselves on coming up with our own trading ideas so this is a bit of an aberration. Sure we use client ideas, but heck, they are our clients. This is one that came up in our Pro Chat and it led to a decent trade idea so I am going to share.