SPX IV a Touch Troubling
SPX IV a Touch Troubling
I have been saying for some time that I thought we were going to touch 1300. Now that we have, where are we going from here? I'll be honest, I am on the fence. There are a few things coming out of option prices that make me bullish:
1. VIX futures are in a somewhat heavy contango
2. Market momentum
3. The way the SPX has shrugged off bad news on Friday
Then there are a few things that I really donít like. Maybe they are more of a long term. Maybe they are short term.
1. Today's turnaround was as bearish as Friday's turnaround was bullish
2. SPX February Skew is Steep
Livevol(R) Pro (www.livevol.com)
While this can mean a lot or a little, the fact that skew is rallying means that traders are no longer simply selling premium. There is SOME protection buying. At around 150% of ATM IV, skew would be considered steep. It could be put spreads trading, or it could be put buying. Either way, a rise in skew points toward SOME increase in fear
3. There is a continued break in correlation
Livevol(R) Pro (www.livevol.com)
While there is some affect of the long weekend causing VIX to rally, even adjusted for the long weekend, VIX was flat to slightly up today. Taking a look at SPX option IV (livevol's equivalent of VIX) we can see that SPX IV is getting a small bid.
The Trade:
In the near term, I am still bullish SPX and bearish VIX, but I think we are seeing some fear in the long term. I will be watching closely in the next few days. If the VIX doesnít get below 21 or threaten 20, when the dust settles, I will be reshuffling my trades. Trades that make sense here are the iron condor. With a slight pop in skew and IV still historically high, I like Iron Condors here; I like being short VIX, and I would consider a January Butterfly.
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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
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