Closing down the week
Most of the week saw sideways action in the major indexes. As I write this the S&P 500 is set to close around unchanged. There were too many cross currents in the global front messing with the mostly positive news domestically. With the S&P 500 at multi year highs the news is going to have to get a bit better for us to rally to new levels. A big Yen devaluation and slowing European growth are not going to pave account statements with a new path to riches. Neither macro issue was a surprise which is why the market shrugged it off a bit. The VIX however is going to close the week in the 12 handle which it has not done very often. Usually we have enough of a selloff in stocks to send the VIX back up. Not so this week. The fact that the VIX is here at all is because of index skew.
Note how the market is closing in the SPY on my OptionVision™ landscape above. The upside calls are getting hammered (in red), some by the 3 day weekend, but the downside puts are not really responding as much as the out of the money calls. Note the IV color change is closer to white which is flat for the day. This is the skew steepening on the downside. The more the at the money volatilities decline the steeper the downside volatilities get relative to the at the money volatility. This is also the market taking the upside pretty much out of play. We might rally but the days of the big 1.5% rallies look dead for a while. The upside butterflies are so cheap it might be worth looking at them. If the downside skew actually starts to settle a lower VIX is not too far behind and the flies should do well.
OptionVision™ – data from ORATS
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