Today was a serious test: was the market going to completely give it away, or was what we saw today the bottom. In clear order, it seems that, all other things being equal, we hit a bottom on Friday. Watching the relationship between S&P and VIX intraday, one could see earlier in the day, even as the SPX was hitting new highs, the VIX was climbing. We quickly sold off.
As vol rallied earlier this week, it was noted by a few people that the spread between SPX vol, the VIX and NDX vol, the VXN is at its widest point in years. One might think that with the NDX calming down and VIX moving back to the sub 14 level that the spread would have tightened significantly...it has not. Take a look:
It has been about a month since the VIX broke from its highs. Since then the S&P has crept higher and/or floated around 1850-1880 somewhat consistently. While there has been some gyration of prices for the most part, SPX vol has been stable. At the same time, VIX has been so stable and range bound at a level that remains stubbornly above 14 and more like 14.50-15%. However, I am wondering whether that time may be ending. Take a look at the VIX futures from Today and two days ago.
Today, after the bell, Citigroup had an exceptionaly large put trade. On top of having a much larger put to call ration than one might expect, one has to wonder if the Fed wasnt the only person that thought Citi's capital plan wasn't up to snuff. IV rallied all day even as the stock kinda just sat there. The most notable trade was a big 'buy-write' trade where a customer bought the 46 puts and C stock 'delta neutral'
Today, as Janet Yellen spoke, the markets got spooked. She seemed to potentially move up the time table on when rates might move. Markets got rattled...for a second. Check out the way VIX and VIX option vol (VVIX moved).
The VIX is now near 14.50, and IV is now back at 75%. Sounds great, except, that is still elevated relative to where the lows have been over the last year or so. So the question is, is the market ready to start a normal move higher, or is this a simple break before China and Russia cause more problems? Keep an eye on the range the VIX trades in, since the VIX topped 20 last month it has failed to hold below 14, additionally IV of the options stayed high and kept creeping higher. Take a look at the chart below:
One of the interesting things to look at is the correlation of a stock to its IV. One thing we know is that typically, when IV is creeping up with a stock price, at a minimum, there is going to be a strong move at some point. The vol will almost always 'pay the piper.' We saw this recently in VIX. While VIX itself stayed stable and (relative to the last year) elevated 14+ , the IV of its options was slowly climbing:
In a recent conversation I had with Amy Wu, of RBC, she brought up that one of the reasons that volatiltiy has been so slow as of late is strategic stock buy backs. It has established floors for stocks like AAPL, and potentially even the whole market. Yet, at a certain point, even with buy backs, IV's get to the point of being silly cheap. It appears that the VXAPL (vix of AAPL) may finally be bottoming after touching levels that we have never seen before (in this iteration of AAPL). Believe it or not, the stock went up and call buyers entered the market for the 1st time in a while.