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.
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.
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:
I am not one to be into technical analysis. However, to say that they completely don't matter is probably a stretch. For instance, up until today, the 100 Day Moving Average was acting like a trampoline. Everytime the S&P touched the level it would bounce. If you think traders weren't watching the level, take a look at how the VIX would move when the SPX crossed 1913 (the 100 Day)
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While I do agree that there is little predictive value in the VIX on its own, two things that I do think have some predictive qualtites are the relative performance of VIX relative to the SPX and VIX term structure. The one I want to concentrate on today is term structure.
I do not think today is the beggining of the end. That said, I think there is a good chance that there is at least a little follow through tomorrow (unless there is some sort of crazy surprize in non-farms). Even so, unless the market is down another 1%+ tomorrow, there is a chance the VIX might actually fall or remain relatively flat tomorrow. At the same time, I expect that VIX futures and the VIX ETN's might all be green tomorrow. Take a look at the VIX vs the CURVE at the close (there was a big TAS trade that ran VIX AUG up after the bell).
I am going to skip the double whammy of the VIX up, SPX up today. Chalk that up to airplanes falling out of the sky and freaking folks out, which it should. All those overseas tragedies add up when it comes to volatility. I for one would like to see them end soon.
So that was fun while it lasted, but in truth it did not take volatility very long to realign itself right back to where it was. Take a look at the curve today and take a look at where it was 6 days ago on Wednesday the 16th.
Today the SPX finally broke its streak of not closing up or down 1%. While that is certainly important to note, it is not the most important thing that happened today. What most important is how flat footed a few trader got caught. While the S&P moved, the VIX exploded. The VIX moved from the low 11's to almost 15% in one day, in what turned out to be an exceptionally short period of time.