I agree with the consus and believe that in the end, the Scotts will do the right thing and vote to stay in the UK. That being said, I think the market might have discounted that result a little too much. Take a look at the SPX strangle that expires on the opening print tomorrow:
Today, while the S&P was mostly unchanged, the VIX was up more than .80. When taking into account for weekend effect a little better than unchanged. Yet in many respects it should have been absolutely destroyed by the market. Why? Well take a look at where movement has been, in and out of meetings, in and out of economic announcements, and wars. Yet for some reason this Fed meeting is being treated as if there is some fundamental change occuring. Take a look at the HV/IV spread:
The news is out Apple is going to have the I-Phone 6 AND the I-Phone 6 PLUS!!! Plus APPLE PAY and the I-Watch. Based on what the stock did, the market acted to the AAPL conference much like McKayla Maroney would to a Silver Medal. With that the VXAPL got smoked. Even more so, the VIX options expiring this week and next week took it in the chin. That being said, it appears the market is still holding out hope for some more movement here is a chart of VXAPL:
I spent a little time looking at VIX vol today. I have to say, it is about as low as it gets...but could go even lower. Take a look at how much HV has plumpted in VIX over the last few weeks. But, taking a look at 30 DAY HV, it is possible things could get worse.
We watch IV's of the SPX and many of its securities like a hawk. Our goal is to try to find patterns that emerge in the volatiltiy markets that can potentially make money. One that we have noticed internally and began to trade off of, in the strategy letter, is Goldman Sachs. Traders have a bad habbit of overselling the premiums coming out of events and after big moves. This is almost always a mistake. Take a look at the pattern of GS when the IV drops below 15%.
As we all know, vol can go anywhere, but is unlikely to stay there. While HV can touch into the low single digits for short periods of time, it doesn't stay there long. Take a look at a 2 year chart of 10 day HV and 30 day IV
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.