We are only 3 months in but I think I found the trade of the year. No doubt the option charlatans out there will talk about this monster winner as the way to make things happen. Buy out of the money options in potential takeover stocks and walk away with untold riches. It is easy, right?
In the last 2 days the market has given away about 45 points, a nice move north of 1% a day in terms of movement. Yet, take a look at the price action of SPY and VIX over the last 5 days (since Thursday).
But Boy was our Founder Spot on:
It should say BINGO!
We open this morning with another launch of .5 to .7% depending on where things get to. I thought last week that 2015 was the year of the Iron Condor in the big indexes because there is lots of daily volatility but not really a follow through in any particular direction. That still looks to be the case. Mostly we have trading ranges that resemble a tempest in a teapot. The Fed keeping things steady (Mark called that several times over the last few weeks) puts another sword into the volatility.
Today the Fed announced that they are dropping the word patient from their statement, at the same time they announced they are patient. The net result was a pop in both short and long term bonds and a strong move in long term interest rates. In addition the Fed Fund Futures are now picking September or October for a rate hike (that might not even come then). The net result was that every 'crowded trade' got smoked except one, the VIX futures. Take a look at the curve:
If the last week has taught us anything its that the VIX might have itself a price whether the SPX goes up or down. Yesterday on the heels of a huge rally, the VIX barely moved. Today, in the middle of a decent sell off, the VIX was much the same. This basically means that traders feel like they have the vol of SPX options priced ahead of the Fed. Which also means that after the announcement the VIX could go back to the circled area below
We have another day like last week where the rally came from nowhere and is most likely not going to go anywhere. It feels like the algo driven market catches any new piece of news about the FOMC release and it is off to the races. The last 6 months has been about macro freight trains, collapse of the Euro, oil and commodity prices with a rocketing dollar. Greece isn’t even in the headlines anymore. As day went most stocks were up and VIX softened a bit before the Wednesday’s release.
The IEA came out and said the bounce in oil was only temporary. That caught a lot of the oil market by surprise as many producers and drillers found new lows today. Now we are dealing with a short term, could be long term, gut in oil supplies as OPEC puts the squeeze on competitors. That was enough to foil the bank rally yesterday. The sell-off was half-hearted at best from a volatility point of view.
While the story of the day was the 8.6% sell off the VIX (if you read the blog you understand the humor behind the last statement), the real blood bath was not in VIX itself but in its options. VVIX, the VIX of VIX got CRUSHED. The index dropped just under 8% (in actual percentage points, not in percentage terms) today, in percentage terms (which is stupid) its about the same as VIX. The difference is that VVIX was trading at 97% when it dropped that much, an actually significant drop in IV terms.