VIX at a Crossroads...Again
VIX at a Crossroads...Again
Seven days -- that is how many days it had been since the VIX broke 30. I was starting to get really hopeful that the Volatility indexes strength over the week was pointing toward some consolidation in the VIX and a subsequent move higher. Then today happened, while I certainly do not consider today to be a nail in the coffin of lower vols it is a bit of a set back...or is it. Take a look at the VIX:
The circled area shows the days below 30. During that time though the S&P's moved with an HV closer to 7%! The VIX was really overpriced relative to market movement. In fact, when we look at STRIKE volatility, we can see the slow rallying in volatility all week.
Today, actually, there was little to no increase in volatility. This continues to be a bullish sign. While we could still see something bad come out of Europe, the VIX was pricing up for this move today, and then did not react like there was going to be a lot of further downside. In the first graph I put a yellow line showing 30, we closed above that level today, if we fall right back below 30 tomorrow consider that bullish...very bullish. If we pop to 35 or 40, look out we are going right back to 1150.
Another interesting point, VIX IV is not exploding, there is not a race to go and buy vol right now. this points toward a strongly hedged market that ran up the insurance premiums BEFORE this VIX move.
The Trade:
Either way the best trade that is out there is the short time spread. There is great upside potential with a vol drop. On the downside, December gamma could be a real weapon right now. It seems to be and continues to be the best trade out there right now.
The cost of buying protection in VIX is still cheap. It might make sense to go out and purchase a call spread against any portfolio. Especially a short VXX or TVIX trade.
Images courtesy of Live Vol.
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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
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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