Who Muted VIX?

While the headlines will read about the S&P 500 getting stomped on Thursday …

 

Those who trade are paying much closer attention to the lack of any movement in the VIX.

 

VIX managed to rally only 0.58 points on a day the SPX was down 50.

 

In fact, as the SPX dropped from only down 10 points to suddenly down 50 points in only a matter of minutes, the VIX barely responded …

 

 

While the two certainly had a negative correlation …

 

The move in VIX is really quite small.

 

At the onset of the move, the VIX was down on the day, and traded about 22 …

 

On a wild quick sell-off, it managed to rally 1.65 points …

 

That is an extremely muted reaction …

 

The cause?

 

Two things:

 

      1. The VIX is already high: At 23.65, the S&P 500 would need to move like it did yesterday every day to justify the VIX level (here’s a secret: it won’t).
      2. We could see hedgers stepping in and taking some profits.

 

In SPX a trader bought a collar tied to futures for size; that is the big news in SPX:

 

 

Traders bought for size two big put-spreads, financed it with a call sale, and then bought an ITM call to deal with the delta it produced.

 

But the other story is the downside skew went off.

 

Take a look at my theos (theoretical fair price) on SPX Oct 15 AM options from the 4000 strike up to the 4200 strike:

 

 

I ran my vols mid day. The first time we were down 40 points …

 

By the end of the day, traders had dropped downside prices significantly in October.

 

What causes this?

 

Put sellers.

 

These are the people that have been holding up VIX for the last three months finally taking some hedges off the table.

 

When we see this type of action, it tends to mean we are getting close to a meaningful bottom.

 

Incidentally, we closed within 0.30 points in SPX from the bottom of last week …

 

My point is that a shake out like this could maybe, finally get the VIX to normalize.

 

Then we could potentially actually get some activity back in the index …

 

Your Only Option,

Mark Sebastian

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