In the last few months we have watched the implied volatility of VIX options basically implode. ?Some would argue that it is a crowded trade. ?I would argue that the options are finally finding a normal volatility after trading above an 80% IV for almost 3 years. ?That being said, the movement in VIX options in the last few days has been extremely odd. ?In the face of a FOMC meeting that many in the market are afraid of tapering and a VIX that is approaching 16 the Jan options have been unable to break 80%.
LivevolX (r) ?www.livevol.com
Yet, ?take a look at 60 (and 90 day for that mater) VIX option IV. ?Notice how 60 day is doing a much better job of tracking VVIX than it normally does. ?It could be due to the VVIX underperformance, but is more likely volume related. ?Paper flow traders are looking to buy March, April and May options in VIX (today a trader bought 30,000 of the Mar 23 calls). ?At the same time traders are selling premium in January to pay for it.
What does all this mean…the smart money is hedging taper in late winter/early spring, NOT in Dec or Jan.
The Trade
We like selling premium in SPX, VIX, VXX, you name it into the meeting. ?We also think despite the fact there will be no taper, ?one has to be a dummy to put on some hedge.
Positions: ?short SPX premium and VIX