VIX Starting to React
Since the market had its 30 point sell off at the beginning of the month, many of my option mentoring students have lamented how poorly the VIX has correlated with the fall in the market place. I have tended to agree with these traders and have pointed out that things have not been nearly as orderly as many of you might think. Today, things are changing. As I stated in this Reuters today, the VIX is acting like the market is really nervous for the first time since this sell off began.
If we look at overall SPX IV from LiveVolPro one can see that despite this sell off not being as sharp as the 30 point drop from June 1st (currently) IV is in relative terms moving significantly harder than it was on that day and the 1st had help because it was coming off a long weekend.
If the SPX ends up down 30 handles today, the VIX will likely be up over 4%, a more than 20% increase in value. This does not necessarily mean that this is a bottom either; however there are some nice things about a day like today. The reason for this severity is that traders are actually buying premium.
1. Those that were willing to wait on selling premium are going to be happy campers, IV is rallying, and skew is steepening. In the next few days we may see a real opportunity to sell into this market drop.
2. With Skew popping, condor are looking somewhat more attractive. Vs one set up 2 days ago, the wing width is 20-30 points wider and the credit is better. I would not jump in with both feet, but I would consider dipping my toe in the water over the next few days.
I do not think this is the top for the VIX, but we could be nearing the top. I felt like we have needed a touch of panic before the market could turn around.
UPDATE:
Adjusted for weekend decay the VIX closed at the biggest one day gain since the Japan crisis. Yes, it was a little less than on June 1st, but if we adjust out the .7% that the VIX adjusted up from weekend decay and you have a VIX that was up about .5% more than on June 1st. This with a drop that was about 25% smaller than that drop. This goes to show you that trader can not sell premium into this sell off forever. Eventually, those traders will, as I explained on TheStreet.com, run out of bullets.
Today's sell off was not the end, but it did mark the first sign of panic that i have seen. I would like to see one more day like this and I might think about buying premium. At this point I am starting seriously considering sticking my toe into a few trades. the following things I kind of like:
1. July is now on top of August, if July gets any higher we are getting near a temporary top. It also can make bull calendars an interesting trade idea
2. Skew has caught a bid, this could be good for condors, especially given that IV has rallied, which as I stated above, makes condors wider.
3. 10 Day HV is popping over 30 day IV, this means gamma might be cheap for a few days. (that could be a good for a short time spread).
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Graph from LiveVolPro
