Are we jumping off the Fiscal Cliff?
I marvel at the market’s ability to parse political activity. My own personal adage is that only a government can make a country broke and a market collapse at the same time. That takes a special kind of decision making from the top and the stock market this week knows it. The market hates uncertainty and having both parties (both were voted back in mind you) potentially draw lines in the sand unnerved traders. Surprise, surprise when both guys (Obama and Boehner) came out looking for a solution (Obama slightly less so since he was the big winner). How did the markets react?
No doubt the collapse this week was fierce. What was funny is that most of it was priced in. The VIX was priced at 18.27 before the election and as I write this it was slightly less, so at 18.13 now. If you look in the OptionVision™ landscape view below of the SPX, today there is a small shakeout in the volatility per strike. For whatever reason today the big players took just a small haircut on the volatility.
Maybe the President gets a bi-partisan solution or not. The market today said they took a small step forward. Until I see the volatility really decline I don’t believe either side. What the market does want is answers and the Fiscal Cliff, however unpalatable, is a spending and taxing answer which folks can budget. From a trade point of view, I would avoid short ATM gamma too much and focus on selling more OTM (way OTM) call and put spreads in the indexes. The problem with government wrangling is that it takes time and is not kind to long gamma positions. Not that we cannot have big moves, but I don’t want to depend on them either with volatility at this level.
OptionVision™ – data from ORATS
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