There is a lot of chatter regarding the recent action in the VIX. The index is by no means a holy grail, but a lot of smart money tends to hang out in the options markets so it’s not an indicator that you want to shun. Anyhow, the VIX terms structure is in a steep contango which is implying a summer slow-down in volatility followed by a massive ramp in October. FT Alphaville wonders if the smart money isn’t preparing for something “scary” in the markets this fall. But MKM Partners is a bit more optimistic about the action in the VIX (via Daily Options Report):
“Although spot VIX has declined sharply over the last couple of weeks to close at 24.56 yesterday, its low since mid-June, longer- dated maturities have barely budged. This upward-sloping volatility term structure is approaching its steepest level in recent years (measured between spot VIX and the six- month future), likely reflecting imbedded skepticism in the aftermath of the May 20 volatility spike.
This condition is typically not sustainable, and we think it must be resolved either with the short end of the curve snapping back toward recent elevated levels or the long end drifting lower. Given our view that spot VIX will remain downward-trending over the intermediate term, we expect the latter scenario to play out. This suggests that the term structure of VIX will flatten while the curve will gradually shift lower toward its position earlier in 2010.
From a volatility trading perspective, this dynamic can be exploited in single stocks via long gamma, short vega strategies (i.e., buying short maturities to sell long maturities delta-neutral). Directional investors who are long stocks with steep term structures and who are bullish over the short term could similarly buy near out-of-the-money calls in one- or two-month tenor while selling further out-of-the money calls around six-month tenor. This creates a leveraged overwrite that provides short-term upside exposure in parallel with the long stock, while committing to selling those shares at a higher level.”
I would tend to agree with MKM. In my opinion there is no “smart money” that knows what is going to occur in October. These markets have had a hard enough time discounting what will happen tomorrow let alone in 3 months. The near-term action, however, is a bit more interesting as the VIX is beginning to find some support despite a very bullish move in equities. A VIX over 24 is by no means low and it now sitting at the exact levels where we were before the market last took a dip. To me, this is the more important story. The smart money is hedging themselves after an incredible 9% move in equities in just over a week. This appears prudent to me….
The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The author(s) may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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Would it be fair to say that the bulk of options purchased longer than a month out, at least on the put side, are done so for insurance purchases whereas shorter dated options are more speculative? I think that is what you are alluding to in your last couple sentences.
If we are still in a cyclical bull market within a secular bear market, this would seem to make sense to me as cyclically the option markets are forecasting lower vol in the near term, but as you have alluded to the long-run dangers seem infinite and thus IV would be higher.
Scratch that, I read the article wrong. I was thinking IV based on forward month options vs. longer dated options, not futures.
I don’t know… the VIX kind of looks like a descending triangle to me. (could be a bull flag, but it doesn’t really look like one)
I’d say it goes lower than 24 for a while, and then spikes again at the 15-16 level. That’s just a pure, wild assed guess though.
It’s what has happened before, however…
Past 2 days move in vIx sure has been interesting. Noticed the creep late yesterday and the upside today despite equities pounding up to 1100.
Also a rather equities bearish move in the 10 year today what with the 6 bps decline in yields.
Today was an important reversal day in my view. Last two times we came in and had decisive overnight action confirming the existing trend only to see it reverse into the open and during the day was the Yuan gap open, which marked the start of a 10% decline and the 7/5 drop in futures to 1003, marking the bottom into this spectacular rally.
I continue to grow more fearful by the day. And the more I hear about QE redux and the hope that it could bring the more I realize how few understand the gravity of the situation and the need to read your site.
Dear TPC,
I am one of those “lurkers” who don’t post comments, but visit your site once or twice a day even on weekends. I found you by my good fortune and realize you are one of the best sources for information on the net. More, you are a source of attitude, thoughtfulness and modesty which makes me trustful of your opinions, even at times I disagree with you. Thank you for what you do!
I came across the following essay today and immediately thought to pass it on to you. It addresses the business/politics nexus in a brilliantly insightful way that may explain much of the malaise in small businesses.
I believe the fundamental cause of any so-called second dip is due to not cleaning up the problems which caused the first dip: a quadrillion $ of bad derivatives, hopelessly bankrupt banks, major corruption of regulatory processes, and putting the foxes in control of the henhouse. These all lead to the reluctance of businessmen to even plan for the future. The present situation is consistent with the inability to plan and is only aggravated by the sense of dread arising from the sum total of the changes the current administration has made to date.
I still operate on the assumption that Obama et al are not stupid or incompetent: they know exactly what they are doing and any one action may seem incoherent unless seen in the context of the whole. To me, the endgame looks like totalitarianism and I am afraid for our country. I would be delighted to see that assumption disproved, but I am closer to despair each day.
Anyway, I submit the link for your perusal. http://article.nationalreview.com/print/?q=YjdkMzRiZjIxZjliN2E1ZjI5MzkxMGNlMjc2ZGM3YWM= I think it is a key part of the puzzle.
All the best to you. I remain your silent and admiring fan.
Doug
Thanks for the link – doses of realities.
Not to bash Obama but he is very clever closet socialist with agenda to rule this country for many years. His immigration policy of late is designed to win Hispanic votes and he is already on campaign mode for 2012. He may turn out to be another Putin once his 2nd term ends and wouldn’t be surprised Obama filling the elderly Supreme Court with his cronies and become totalitarian for years to come.
I notice the Vix was quite strong yesterday, despite relatively calm economics. Longer-dated Vix futures rose too, but by less. An early sign of spread closure? Too soon to say, but this will be interesting to watch going forward.
Longer dated VIX suffers from “horrible” technicals. The street is massively short longer dated Vega as it was a favourite long risk trade in the derivs world this year. Further there is a deep structural bid for longer dated volatility from US Insurance companies
The VIX curve as a result is always steeper relative to say the VSTOXX curve which is mostly flat This is why the VXX has been a very expensive hedge overlay for a book!!
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There is a lot of chatter regarding the recent action in the VIX. The index is by no means a holy grail, but a lot of smart money tends to hang out in the options markets so it’s not an indicator that you want to shun. Anyhow, the VIX terms structure is in a steep contango which is implying a summer slow-down in volatility followed by a massive ramp in October. FT Alphaville wonders if the smart money isn’t preparing for something “scary” in the markets this fall. But MKM Partners is a bit more optimistic about the action in the VIX (via Daily Options Report):
“Although spot VIX has declined sharply over the last couple of weeks to close at 24.56 yesterday, its low since mid-June, longer- dated maturities have barely budged. This upward-sloping volatility term structure is approaching its steepest level in recent years (measured between spot VIX and the six- month future), likely reflecting imbedded skepticism in the aftermath of the May 20 volatility spike.
This condition is typically not sustainable, and we think it must be resolved either with the short end of the curve snapping back toward recent elevated levels or the long end drifting lower. Given our view that spot VIX will remain downward-trending over the intermediate term, we expect the latter scenario to play out. This suggests that the term structure of VIX will flatten while the curve will gradually shift lower toward its position earlier in 2010.
From a volatility trading perspective, this dynamic can be exploited in single stocks via long gamma, short vega strategies (i.e., buying short maturities to sell long maturities delta-neutral). Directional investors who are long stocks with steep term structures and who are bullish over the short term could similarly buy near out-of-the-money calls in one- or two-month tenor while selling further out-of-the money calls around six-month tenor. This creates a leveraged overwrite that provides short-term upside exposure in parallel with the long stock, while committing to selling those shares at a higher level.”
I would tend to agree with MKM. In my opinion there is no “smart money” that knows what is going to occur in October. These markets have had a hard enough time discounting what will happen tomorrow let alone in 3 months. The near-term action, however, is a bit more interesting as the VIX is beginning to find some support despite a very bullish move in equities. A VIX over 24 is by no means low and it now sitting at the exact levels where we were before the market last took a dip. To me, this is the more important story. The smart money is hedging themselves after an incredible 9% move in equities in just over a week. This appears prudent to me….
The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The author(s) may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
Post Footer automatically generated by Add Post Footer Plugin for wordpress.
Would it be fair to say that the bulk of options purchased longer than a month out, at least on the put side, are done so for insurance purchases whereas shorter dated options are more speculative? I think that is what you are alluding to in your last couple sentences.
If we are still in a cyclical bull market within a secular bear market, this would seem to make sense to me as cyclically the option markets are forecasting lower vol in the near term, but as you have alluded to the long-run dangers seem infinite and thus IV would be higher.
Scratch that, I read the article wrong. I was thinking IV based on forward month options vs. longer dated options, not futures.
I don’t know… the VIX kind of looks like a descending triangle to me. (could be a bull flag, but it doesn’t really look like one)
I’d say it goes lower than 24 for a while, and then spikes again at the 15-16 level. That’s just a pure, wild assed guess though.
It’s what has happened before, however…
Past 2 days move in vIx sure has been interesting. Noticed the creep late yesterday and the upside today despite equities pounding up to 1100.
Also a rather equities bearish move in the 10 year today what with the 6 bps decline in yields.
Today was an important reversal day in my view. Last two times we came in and had decisive overnight action confirming the existing trend only to see it reverse into the open and during the day was the Yuan gap open, which marked the start of a 10% decline and the 7/5 drop in futures to 1003, marking the bottom into this spectacular rally.
I continue to grow more fearful by the day. And the more I hear about QE redux and the hope that it could bring the more I realize how few understand the gravity of the situation and the need to read your site.
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