Stocks Selloff, VIX Starts to Budge

Andrew Giovinazzi

BY ANDREW GIOVINAZZI

August 18, 2023

Yo Pit Crazies,

VIX had the highest close since May … and to be honest, it never recovered from the Fitch downgrade of two weeks ago.

We got back to the mid 14s this week, but the lower vol we had all summer is a thing of the past as we move into fall.

My closest theory is that Fed Chair Jerome Powell is raising rates because the US Government thinks it can spend forever. Bond buyers are getting yield now, so there’s a considerable group of folks not worried about 3% inflation making 4+% on the 10 year. This is now draining money from stocks.

VIX is still pricing a lot more of a move than is really happening. So are traders expecting more or is it the result of something else?

Inquiring minds want to know!

VIX Pricing is the Result of Many Things

Check out the implied volatility in the SPX Sep15 cycle, which is roughly the VIX cycle options in the calculation:

As I move up the strikes, SPX IV per strike goes down, and as I move down the strikes, SPX IV moves up. That means a lot of the natural volatility in VIX comes from just moving up and down for SPX, since the VIX is a vega weighted calculation. SPX has moved steadily from 4600 to 4370 in two weeks, so VIX has to increase over that period of time.

For an example, I picked the SPX Sep15 4370 strike. The SPX Sep15 4370 put had a low price on Aug01 when SPX peaked and IV was very near the high. Since then as SPX has to move to 4370 and it’s now the ATM instead of the 230 point out of the money put, IV has declined as the value of the put has increased.

IV in SPX has not increased along the vol curve and that is a subject we covered in the Trading Desk today. Stocks have had a steady decline as the Fed removes liquidity, but nothing crazy yet.

I’m out today, and I closed 90% of my SPDR S&P 500 Trust (Ticker: SPY) puts on Thursday. I’ll keep an eye on things if the skew and IV start to expand again, as right now it’s at very low levels.

I sold an Iron Condor in SPY in my CBOE Double Double idea from Tuesday. I closed the CBOE calendar for a scratch as it is the only stock up for the last 3 days.