As I listen to traders belly ache about the 'low VIX', I ask them, "why should the VIX be high?" They will usually point to a bunch of reasons, none of which are in the near term. Right now, the VIX is trading near 13.5 and for good reason. Despite last week's moves, realized volatility is in the toilet. With the market moving nowhere, traders are selling SPX premium in the near term. Does this mean the market isn't cognizant of the coming risk? No, not at all, the market is already pricing in a lot of risk after Feb expiration. Take a look at the VIX futures curve:
Our COO Mark was asked by several different media groups why the VIX was so low today. After all, the VIX was just over 22% last Friday (a 52 week high); now it is trading at a 52 week low only one week later. Our answer was simple, the VIX is so low because it should be this low.
In the chart below, I point out when the VIX hits its peak on December 28 2012 (the yellow circle). I also point out that IV was 'predictive' of the movement that we saw on Monday and Wednesday (also in Yellow), when the S&P futures rallied 75 points in 2 days.
Our COO Mark was on Bloomberg TV discussing GM options trading. A report from Nikolaj Gammeloft from Bloomberg news discussed how skew levels in GM puts were at the highest levels we had seen in some time. Mark was asked to develop a trade based on GM put skew, and his outlook for GM. You can watch below:
It's been interesting to watch this fiscal cliff debacle develop. A week ago, I had the market pricing in a 92% chance of a deal getting done. Yesterday morning, the market was pricing at about an 80% chance of a deal getting done. Today, that number remains close to 80, although slightly below that now, near 75%. In fact, we can clearly see in this list of SPX weekly option vols what is driving up the VIX:
I would point out that the last time the spread got this insane, the VIX went UP, not down. The other piece of data is the VIX term structure, which is still normal but barely. Cash is is trading all over the place due to holiday's and the fear of the immediate:
As it is going to be a slow day today, I thought readers might be interested in reviewing some of out most read blogs of the year. Here are the top 5 blogs, in terms of total number or readers, on the year. I hope you enjoy them:
Every quarter around this time, I get a call from at least one or two option mentoring students asking about all the call volume. "Mark, have you seen all of the call volume going up in the ETF's?" Then they send me a scan that looks like this:
Not the best grammar but I wanted an attention grabber.
Did anyone catch the volatility markup at the end of the day today? We had fairly solid preopening activity this morning, but news of the budget standoff sent the market into a small tailspin. The volatility players are in the serious business of trying to handicap the outcome of the Fiscal Cliff talks. Yesterday players were pricing in a much better shot of things going through earlier than not. VIX traded as low as 15.57, as it sold off most of the day yesterday. After an aggressive print on VIX settlement this morning, volatility traders started buying options in Jan cycle for the big indexes.