抛物线01 S&P 500 Implied Volatility dropped 30% in 3 days!!

trin =3 07292011

What Happens to VIX If the House Can Pass a Vote

Posted by msebastian on Thu, 07/28/2011 - 8:23pm

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I was talking with my fellow traders on The Option Block today (take a look at the player below the blog roll to listen) discussing what I thought was going to happen in the market tomorrow. I have one prediction; if Boehner cannot pass a vote tonight, we are going to have a big sell off tomorrow. Why? Its not that time is running out, but that it will prove to the market that unless a catastrophe happens, we are likely to blow through August 2nd. I discussed that scenario on this blog yesterday.

But, what if Boehner does get a bill through, what happens next? The short answer is that I think it puts us on a short path toward a huge market rally. Yes, there may be some continued downgrade discussion, but the whole market will breathe a huge sigh of relief. If Boehner can pass this, he can get a compromise through the house, even if the senate kills his exact plan. The point is the crisis's short term end will be a foregone conclusion (much like the Greek confidence vote). Knowing this, how will the S&P 500 IV act? Take a look at what it did on the wake of the Japan Meltdown:

S&P 500 Implied Volatility dropped 30% in 3 days!! I think we something very similar coming out of this crisis. So how would one play it? Simple, the best performing trade in the S&P 500 was the put or the put spread; I expect that trade to continue to be the best trade out of a crisis. A trader who is quick to sell as IV eases should be able to make a very quick buck. For condor traders, I think it is probably better to wait 2 days before entering. The trader will still be able to capture some drop in volatility, but will miss the wicked run up.

Portfolio Insurance

VIX IV is incredibly high right now:

Traders looking to hedge a portfolio are likely much better off buying VIX futures or buying S&P 500 puts than buying VIX options. Skew is super juicy as well. Consider this; buying VIX calls here is like buying super expensive calls, when a stock is near its 52 week high. And with a product that mean reverts (unlike stock) I find it hard to fathom a call hedge that is likely to work will here.

The next few days should be fun. Before trading be thoughtful, but do not be afraid, those who sit in fear miss opportunity.

We are presenting a new version of the A Trader's Guide to Volatility! If you missed the first volatilty course, this is your chance to catch it live. It is also updated to discuss currencies, commodities, more of the VIX etns and Vol Contract Futures. Register here: Volatility Course. Sign up for our L3 services and this course is FREE. Sign up for L2 and I will give you the recording of the OLD volatility class for free (still a great course). Email or call us for more information.

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