As we move into the FOMC minutes release VIX was down around .43 yesterday to 12.21 at midday. ?In reports past the VIX has generally held steady up to the report but 2014 is starting to look different. ?The FOMC is probably going to continue to exit their bond buying routine and let the economy stand on its own. ?They might even signal rate hikes sooner. ?With the inflation report today it would seem the market wants some inflation. ?
Note the SDEX index, which is the 25 delta put IV to the atm put IV in the 30 day options in the SPX. ?The higher the SDEX the steeper the skew. ?There might not be a bid for the ATM options but there sure is for the OTM puts. ?Note that the last two times SDEX jumped over 66 stocks sold off, once bigger and once a little less.
charts by Google Finance
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charts by Google Finance
If ?there is a pattern it is that the high skew is a tell for a selloff. ?That ?is where we find ourselves now. ?The market recovered each time but there was a down draft nonetheless. ?I think market players want to stay long and are buying cheap puts this time around as they dod not want to get shaken out of their longs. ?Stocks want the taper to continue and barring a set back in Iraq long is where you want to be.
The Trade
Maybe owning closer to the money options and selling the OTM options would work. ?Some thing like a short Iron Butterfly where you sell the OTM put and buy the straddle. ?Make sure you can hold on to the position in case we tank and the put spread pays for the call. ?Forget about the short upside call as this mkt likes to run.
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