Thursday, December 20, 2012

Aqumin Volatility Newsletter - December 20, 2012 $SPY, $VIX

Skew Vision

One of most quoted indexes in the financial industry is the VIX. It is also the most misunderstood. How so? The reality is most participants do not understand what the makeup of the product is. Yesterday the VIX spiked to 17.46 just before the close. I know readers of this blog will say the deficit talks stalled and they would be right. Now what did paper actually do? Let’s unpack what caused it.

What I find interesting is how the buying played out. Normally when you see a spike in IV and a market heading south, the paper is flying to the OTM puts. That steepens the skew curve on the downside. What we had today was something a little different. What you see in a 3D curve graph below is that the upside today started to pick up more of a bid.

Looking at the highlighted area of the upside calls in the SPY on my OptionVision™ landscape, you see they were up 5% or more (dark green). You say big deal, but in the land of skew those options were moving more than their put counterparts. Relative moves are important when looking at index skew and when the upside starts to outperform the downside on a big IV move, paper is buying calls or at least that is where the worry shifts.

12-20-2012 9-26-21 AM

The market is having a hard time pricing the gamma (a big up move possibly) with the vega (the attendant volatility crush). Paper just started buying calls and liquidity providers stiffened the upside skew. That is what I am going with because that is what I see. If you don’t believe the market thinks volatility is headed lower just look at the Jan VIX future. Day one on the job as the spot month and it went backward with the full term ahead of it. Not exactly a rousing bid for juice.

Use dip in the market and pop in upside skew for either Iron Condors or long calls spreads in the major indexes. Maybe Christmas comes early this year.

OptionVision™ – data from ORATS

Read more from Andrew at Option Pit

No comments:

Post a Comment