Where the volatility is
So the Fed is leaning toward 2015 to start raising rates? There is not much different in that announcement as the Fed watchers look to parse all of the twists and turns in the FOMC meeting minutes. I think that after this long in our plodding recovery, market players would be happy to see the Fed exiting. That means things should be getting better, but that is just me.
Slightly strange then today as the usual drop in VIX had more juice come out of the ATM options. Granted the news was more status quo so the ATM IV should drop, but I thought it would take more of the OTM IV as well. The drop in the curve would be more uniform. That is not the case as you can see from the OptionVision™ Inverse Volatility Landscape. IV ATM came in a bunch (tall red buildings are the most) but the skew heavy downside did not come in much at all. There is one more issue on the horizon.
I think the skew is staying bid because of the Scottish referendum. The Euro Zone (or near it) does not need another bird leaving the nest and the dose of instability it will cause is enough to unnerve traders. 2011 is still fresh in everyone’s mind.
At this stage I will go with the exit polls and say Scotland stays in. William Wallace might be rolling over in his grave but he did not have free healthcare and Cool Britannia. The trades that make sense are Iron Condors in the big indexes. RUT or SPX is probably best as the last of the skew should die by Friday. Stay away from the ATM in case William Wallace gets his revenge.
Read more from Andrew at Option Pit