I like working at Option Pit with Mark Sebastian and I like our clients. Well one it is fun, most of time, and we have great clients. From time to time we get some solid observations from them. That is another thing I like. Having a different perspective from traders you have helped educate usually means some interesting stuff know the foundation is solid. So I am giving one of our clients some props here for this one. He knows who he is.
Note that when realized volatility dips below 5% on a short term basis it usually does not stay there for too long. I have 10 day RV down around 5.41%. Right now the first 3 Weekly terms in the SPX are all below 9%.
I understand there is a major difference between straddle price and actual movement, because most pricing models assume dynamic hedging. The SPX is now 2000.00, does anyone see the disconnect in the weekly straddle price? Take a look at this trade ticket:
The blog post that really broke out our blog was this one involving Time Decay and the Weekend (we will always have a special place in our hearts for Bill Luby pushing it out). To sum up the post, we explained how market makers 'moved the clock' on their machines to bring implied volatiltiy down with out screwing around with their actually vols they were running. The basic point is that market makers take weekend decay out over a few days at the end of the week which causes VIX to drop on Thursday's and Friday's and to rally on Monday's.
Close but not quite there yet. SPY traded 199.75 today as the 200 level hangs like the Sword of Damocles over the market. Everything is feeling good and long equity positions are kicking butt. In short living the good life like Damocles envisioned. However, the sword is poised to drop if Janet Yellen cuts the horse hair on rates and down the market drops. There is some weird tension on that tenuous horse hair of volatility.
Yesterday I made a comment on how I thought VIX futures were maybe oversold. I was right, but not in the way I thought. Today, despite the VIX threatening 11.5% and the SPX hitting an all time high, the VIX futures curve barely moved:
The reason they didn't move was because the VIX futures were oversold. They were anticipating today's move and were pricing in the cash VIX adjusting to the futures, not the other way around like I thought. Notice how on top of eachother the curve yesterday and the curve today are, then notice the difference in VIX.
Another day another rally in the good old USA as America Inc. keeps delivering the goods. More solid earnings and home start data got us off to another good start today. Market players are waiting on Yellen to report some lower to stabile rate news, which could send stocks even higher. I see that 200 number on the SPY and can’t help but think that is the next round number to cross the line.
Yet another rally on no bad news as stocks love the lack of action overseas. That was kind of a mouthful. There is no doubt that the gravity is pulling stocks up overall. The rally to all-time highs in the face of overseas unrest is just another reason to believe in the rally. Another reason to believe is the lack of a bid in IV. The VIX cannot hold a bid for anything even as a near panic hit volatility of Friday morning. By the end of today it was all forgotten.
Stocks are shaking off just about everything at this point such as Iraq, Iran, Ukraine, Syria and of course that paradise on the Med, the Gaza Strip. Slow growth in Europe, who cares. WMT swamped in health care costs, take it up. Volatility, well just sell the crap out of it. VIX is now deep into the 12 handle and we might sniff 11% tomorrow.
While I believe that the VIX is not going to 20, I think today's move below 13% might be over done. The VIX has not just eased off the last few days, it has borderline crashed. Take a look at how it looks incomparison to the S&P: