SPX, VIX Point Toward Higher Fear...for Now
SPX, VIX Point Toward Higher Fear...for Now
Option traders, I was a quite a bit wrong last week. The math I did on implied volatility was off. I assumed that once the Greek vote of confidence got through the Greek Parliament, the austerity measure was a done deal. Apparently the situation is a little more complex than I anticipated...
Apparently behind the scenes on top of forcing Greece to accept strict austerity measures, there has a been a tough push from Germany for many banks to forgive, roll, or re adjust much of the Greek debt they have on their books. On top of that, the Greek vote on the measures is somewhat still in doubt. Add this to ISM numbers this week and we have a little bit of built up fear in the market place. It is because of this that:
1. VIX futures are holding stable and in a flat to slight backwardation term structure depending on the day. The spread between July futures and cash is flat, and the spread between July and August is only about .45. One error I made last week was assuming that the spread between July and Aug widening was a sign that we were all clear. While July and cash have caught a bid August has stood still. This does imply that the current fear is perceived as short term.
2. SPX IV itself is in backwardation between July and August. Ahead of Greece traders are buying the gamma in July, thus July IV is higher.
3. Skew structure is steepening: In the last few days, both July and August have seen puts increase from near 130% to over 150% of ATM IV. This while IV has been increasing or stable. This is a clear sign of fear, and that puts, more than any part of the curve are bid. A steepening curve on a rally is a sign that traders do not believe in the rally.
4. Despite the rally in the market, IV was up or unchanged along most of the curve save a very small portion of calls directly out of the money. And has remained elevated since the middle of last week.
5. One thing I did find interesting is that while SPX IV was flat to up, VIX IV was down significantly. This was driven by some decent sized call sellers in the product. This is another sign that traders are not buying this sell off as a long term event.
I think the Greece event will be quite an interesting one, in the end I do not see how a vote doesnít pass. I look at the current market as a chance to sell implied volatility. For those that fear Greece and think things could get hair, a short time spread might make sense. For the rest of us August might not be a bad sale even September is looking interesting.
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Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
To learn more about Option Pit and its mentoring services, please visit OptionPit.com
About Mark Sebastian
Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University.
To learn more about Option Pit and their mentoring services, please visit: http://www.optionpit.com
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