Last Friday we wrote how the SPX ATM straddle was pricing in a level of around 34 bucks a spread, this after the SPX had just ripped up 70 points or so. At the time VIX was around 16. Since then the market has ripped up higher a little over 35 points. The straddle is worth close to 40.00 a spread. Today, the VIX is down to below 14.50 after moving 35 points in 3 days. With 8 full trading days to go, the SPX straddle expiring next week is pricing in under 33.50 dollars a spread.
No it is not a tasty sandwich from the Potbelly shop close to the CBOE. It is a pattern we found in our chat room at the Option Pit. Yeah, Yeah I know you will say it is a “wedge’ but pox on that. It kind of reminds me of a sausage grinder. Meat goes in and sausage gets spit out. In fact one of our clients came up with that. VIX kept grinding with the SPY and doing nothing really.
It is possible we are back to the days when the NFP numbers mean something. Stocks are more edgy lately as the intraday volatility picks up. The 16 VIX right now is justified on the touchy moves over the last 4 or 5 sessions. The bid for volatility today belies something else. I see some unrest potenital from PIMCO but I do not think that is it.
So the Fed is leaning toward 2015 to start raising rates? There is not much different in that announcement as the Fed watchers look to parse all the of the twists and turns in the FOMC meeting minutes. I think that after this long in our plodding recovery market players would be happy to see the Fed exiting. That means things should be getting better, but that is just me.
Close but not quite there yet. SPY traded 199.75 today as the 200 level hangs like the Sword of Damocles over the market. Everything is feeling good and long equity positions are kicking butt. In short living the good life like Damocles envisioned. However, the sword is poised to drop if Janet Yellen cuts the horse hair on rates and down the market drops. There is some weird tension on that tenuous horse hair of volatility.
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:
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We all know the story. Troy is finally sacked by the gift of an enemy-impregnated horse the size of a house. Browsing through the WSJ online I see an an Orthodox Priest blessing a fleet of aid trucks. I half think there might be some Spetsnaz Commandos lying in wait in those bad boys. With the gimpy stock market today I am not the only one. I am all for Putin giving aid to the hungry but it is still tough to believe.
I started trading options as a floor trader in 1991 right about the same time as Gulf War 1. The runup to the war was characterized by gloom, volatility and really weak stock prices. I think the Dow was 2300 or so. Not much has changed in the 24 years since then through several other political crises and GW2. The one constant has been after the USA goes in and starts shooting, stocks rally and the VIX cracks. Until today that is, or maybe.
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)
This day kind of reminds me of the anticipation before walking on a trading floor some mornings. Something is going to happen but you just don’t know what. The first instinct is to raise the bid in the options a little bit and do some price discovery. The corporate earnings news and economic data has been pretty good lately so the heeby geebies are not from there.