The market did not like any of the numbers yesterday.? It did like FB and ZNGA but pretty much sold everything else.? The two leading groups this year, banks and transports both took it on the chin.? While I expect any healthy market to sell off now and again this was a funky sell off.? Why?? The easy answer is the volatility did not go up that much.
So you say the VIX was up 1.59 to 14.37 as I write this, and it was.? The April VIX future was only up .87 to 14.67.? That leaves a paltry .30 of future premium left with two weeks to go which is very light historically.? Now look at the VIX Apr options.? There is enormous open interest in the upside VIX calls and the idea here is most of that is paper buying.
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?Livevol (R)?www.livevol.com
We also have had a pretty steep index skew with our rally to a record.? Essentially paper is buying index puts keeping the VIX from breaking 12.? All this adds up to a market that has bought lots of protection and at some point traders will have to use (sell) it out to collect a profit.
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Above is a midday snap of option flow (height) and volatility (color).? Note that most of the VIX Apr options have volatility down around 130 pm ET today.? That is telling me call sellers were exiting some of the long VIX positions.? There is nice little chunk of paper buying the VIX May 25 calls but it barely moved the volatility needle.? I think a lot of this action points to a market that is protected with VIX calls and SPX puts and not afraid to let them fly if we have a down draft.? This is the proverbial ?hedged? market.? This selloff suggests that a part of those hedges were unwound.
The Trade
Watch the open tomorrow and look to see if the rally in volatility can hold up.? We just had a 1% move and the market could not get to a 16% VIX.? If the volatility starts to crack look at some puts in the VXX.
If you want to learn what all this means- ?This is the type of information we will train you to analyze in our?gold course. ?If you needed help following this trade, you should be in that course. ?Call us at 888 Trade 01 and ask for Taylor or Joel.