Option Markets Unimpressed by SPX dropping below 1100, VIX over 45%
Option Markets Unimpressed by SPX dropping below 1100, VIX over 45%
While reporters will be talking about the VIX topping out above 45% and the SPX breaking 1100 for the first time in 2011, those in the know do not seem to be too impressed by what was going on yesterday. As I stated on FOX Business News Today, despite the sell off today the markets seem to have a sense of volatility exhaustion today. There seems to be a malaise where traders are either fully hedge or are moving to cash and taking off their hedges at the same time. To put things in perspective letís look at what a VIX of 45% really means:
On an annual basis the SPX would have to move about 495.00 a year in either direction to 'pay for' a VIX of 45%. On a daily basis the SPX would have to move over 2.8% a day to pay for the VIX. That could be why option premiums were actually DOWN today, and VIX IV was flat on the heels of a sell off.
Taking first a look at VIX, option IV was unchanged. This is impossible if traders are out buying up a bunch of VIX insurance:
Next take a look at SPX. Looking at SPX we can see why VIX premiums are not moving. SPX premiums are moving, just not in the way the VIX is reading. Across the board SPX IV is down today on a strike to strike level.
The 1000 puts
The 1100 calls
The 1175 calls
The reasons for this are that at 45%, the SPX canít move 30 points and pay for the VIX, SPX needs to move more. I think this is signaling a fully hedged market or a market that is prepared to handle a 30 point down day every day for the time being. As I have stated, the way VIX futures, and VIX are trading, it appears that all is coming to a head in the next few days or weeks. My not confident prediction VIX below 30 by Halloween.
Images courtesy of Live Vol.
------------------------------------------------------------
Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
To learn more about Option Pit and its mentoring services, please visit OptionPit.com
Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
To learn more about Option Pit and its mentoring services, please visit OptionPit.com
About Mark Sebastian
Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University.
To learn more about Option Pit and their mentoring services, please visit: http://www.optionpit.com
View Mark Sebastian's post archive >
