After the bell, no matter where the VIX ended up closing, the news on the closing bell was going to be how the VIX was up 10% or more, which is some kind of huge move in the ‘fear index’. However, ?there are some things we have to remember about the VIX. ?It has distortions. Most notably, it is price sensitive, and weekend decay will throw off the calculation. ?In truth, vols felt heavy all day, and here is why:
As I write this, ?the SPX is down about 14 points, ?about 1%. ?Thus, ?the natural move down the Skew curve for the SPX is going to cause the VIX to rally. ?On top of that, coming off a weekend, the VIX should be up about .75 points anyway. ?The key to understanding what IV is really doing is to look at what IV is doing on major strikes in the months that the VIX is using to calculate its average.
In the near term months, where we will see the ‘weekend effect’ hit options hard, the move higher was about 1.00 or less across the board. Take a look at the?
FEB 1475
FEB 1500
FEB 1510
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In March, where there is almost no weekend effect, the IV on options was even more muted. ?On most strikes, IV movement was about .20-.30 of a percent, almost nothing.
MAR 1425
MAR 1500
MAR 1525
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The Trade:
Option markets were not buying into a major sell off and were selling premium into every move downward. ?I wouldn’t be shocked if the market rallies after I write this, and I would be looking to go long at any dip below 1500. ?I might look at a SPY 151-153-155 call fly. ?The trade costs about .50 and has a nice risk reward on a slow rally, which I think is more than likely. ?
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I also think VIX Futures are probably a sale here, as is the VXX
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