So why did traders crush vol?
Around noon yesterday?I was working with a client in a mentoring session discussing risk management when something strange happened. ?The SPX rallied about 3 handles…not strange, but with that rally came an absolute woodshed style THWACK to VIX and VIX futures. ?In a matter of minutes VIX went from Flat on the day to down .80, ending down about 1.25. ?VIX futures for there part gave away almost as much in a short period of time falling from 20 back to 19.50 i minutes. ?Consider the size of the move yesterday and the economic data ahead it was a bit of a surprise to see such a knee capping of vol.
So why did traders crush vol. ?My best guess is this: ?while there is still plenty to be uncertain about out there, for now many traders feel that the risks associated with Chinesse equities are a bit of known commodity. ?Think of it as expecting to get punched vs being blindsided. ?Even with the same force the punch feels different. ?This may be the major difference between August and January. ?It now appears that the VIX is destined to move lower over the next day or two despite payroll numbers.
The Trade:
I think there is an interesting opportunity to buy puts in UVXY or VXX into tomorrow morning’s action IF the SPX is up.?(Editor’s note: this was written on January 5 and posted on January 6)With VIX still near 20, ?we need a gap down in the morning to sustain things… I am not sure we get it.
Disclosures: ?The Fund Mark manages trades VIX and SPX products