Major Players Buying SPX Premium
At the beginning of June when the market had its first of several major down days, I made note of the fact that the market was a major net seller of premium. I noted these stats from June 1st:
Despite a sell off of 30 points in the SPX, the market had been a net seller of premium and a buyer of deltas. Mostly from put sellers. This was a precursor to a wierd sell off. One in which the market sold off near 8% and yet the VIX only rallied up to to about 24% at the absolute peak of a small one day panic. All in all, at no time did the market really lose control of itself and I do not think anyone thought that the SPX would break 1250.00.
Today, I was looking for similar things in today's sell off, my belief being that if we saw that same type of premium selling that this sell of might not have legs. However, today we did not see traders selling premium into this sell off. Notice the change in SPX delta's sold and premium purchased today:
This should be considered a very bad sign in the market. It also explains why SPX IV was up more today, than it was on June 1st:
I think we are lining up for a major sell off. The recipe is as follows:
1. Smart Firms (the GS and BAC's of the world) do not sell into this downturn, as they unload futures
2. Dumb Firms (less sophisticated funds and the retail public) do not take cue from Smart firms, thus selling into this market
3. Bad news out of Europe
3. SPX hits 1250's, smart firms are not there to buy futures. Dumb firms panic and buy back short options while selling futures as quickly as they can
4. Market sells off in a major way
5. Smart paper steps in around 1100-1150
6. Market bottoms
Now, is that what is going to happen? I dont know, if I did I wouldn't be here I would be living on my island. However, there is enough risk for something like the above to happen that I am not really willing to unload right here. The VIX is higher, however its not that high, skew is higher, but not that high. The risks do not match the reward. Ill look at selling small when the VIX cracks above 20 however I think we could blow through 25 this time.
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