Withering Volatility
Getting a feel for market volatility is not always easy. Take Thursday’s market activity as an example. The market had a roller coaster ride and ended down 1%. Super Mario basically said nothing in his policy statement that he had not already said before. That pretty much flushed the Euro, Spanish Equities and the US markets (T bond notwithstanding, of course). But getting a deeper read is necessary to see what the market is really thinking. Let’s read the new OptionVision Landscape.
The Landscape is just the VXX Volatility Landscape for yesterday. The dark red in August VXX means the implied volatility was down for most of the strikes in play. I took this snap when the market was actually close to the bottom. You will note the green spike in September (spikes are higher than normal volume). That was a buyer of OTM calls in the VXX in the panic, which was most likely part of a spread trade in the other two spikes surrounding it. Overall the volatility trend was down (note the red on most of the active strikes) and it was down when the market was not acting well.
If the volatility of a volatility product like the VXX is in the can today, expectations for greater volatility in the near term are pretty low. As a matter of fact I bet the implied volatilities go lower for the next week or so in this August cycle. Now that the market knows Super Mario is willing to step in and buy bonds (maybe) and Big Ben is going to wait for the politicians to get elected, most of the game is out. Welcome to the sideways markets. I bet the VXX trades $12 next week.
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