The Best VIX Indicator

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What is a VIX indicator?

The VIX is a measure of 30 day volatility in the SPX.  The real problem with VIX is that it measures a narrow band of activity in the options.  VIX does not measure 5 day to expiration options.  It does not measure today’s expiring options.  All of the volatility along the SPX term structure does go into the VIX indirectly.  It gets there by the shifting inventory of the SPX liquidity provider.

SPX liquidity providers drive the boat, paper hits the gas pedal

Imagine if you were a liquidity provider in the the SPX and a customer, known as paper, sold 100000 put contracts to the crowd with 3 days to go to expiration.  That is a big chunk of options and would provide a ton of short term gamma to the crowd.  If the crowd does not need gamma, the bid for IV in SPX would drop and VIX would drop with it to some degree.  That is supply and demand at work.  Lately there was a divergence in short term volatility and the VIX.  Paper was selling short term options but not really selling 30 day options.

VIX really increases when both sides of the market are in play

The current Trade War has put a near hard top at 3000 SPX.  Time and again that level holds like a giant electro magnet. Uncertainty is taking the upside out of the equation.  With one side of the market dead, short term IV started getting cheap again this last week.  The 30 day IV was not dropping for the simple reason no one was closing a position.  The small move today was more on headline political news than anything substantial.  Liquidity providers reflated IV quickly AFTER a green opening. Without sellers of 30 day vol there is no reason to keep it lower.

VIX futures compressed but still show health contango from Vixcentral.com
backwardated term structure says more realized vol to come from Livevol.com

SPX weekly term structure is just backward, VIX futures in contango- No Bueno VIX indicator

SPX short term options say we are moving and VIX futures say we expect higher VIX in the short term even with the big move up in the VIX cash.  Not my idea of an all clear sign by any stretch and I expect larger moves in SPX coming in the near term.  I like long VIX strangles in the Oct cycle.

Disclosure- positions in VIX, SPX, SPY

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