The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move Wildly
The FOMC makes its big announcement today, followed by a new conference from Jerome Powell.
Heading into the event, many might be surprised that the VIX is all the way down to 25.81. The Fed has driven so much volatility, it’s worth wondering … or is it?
One thing that has changed in the last year is S&P 500 daily options.
Traders can now trade SPX options that expire every day.
That means the old metric of looking at 30 day vol might not be as important for event volatility.
To that point, take a look at IV’s between options expiring today relative to options expiring in 30 days …
The IV of options expiring on November 2 – 38.78 – will be higher on today.
The IV of options expiring on Dec. 2 is 24.42.
Traders are now able to play the Fed using options that expire the same day, instead of options expiring in a month.
This is dampening the event-driven portion of VIX to be more tepid.
Heading into today, the S&P 500 is actually pricing in a huge move of about 60 points. That’s good for close to 2%.
That is the market telling us there could be some volatility today.
The December 2nd straddle is 220 points. That means that a full 28% of movement for the next 30 days is all priced into options expiring today.
That is what is dampening the VIX.
Now what do you do about it…
VIX is still going to move on the FOMC …
Traders can buy puts and buy call spreads. One of them is going to win big…
Questions about that? Drop a comment below!
Your Only Option,
Mark Sebastian