Odd day. We have a move lower in the index to prices from July 11th, (filling the gap we spoke about yesterday) and the VIX is 14? The futures could barely rouse from their snooze to participate. Clearly fear is not part of this equation. The big winners were index put holders. My gosh, just look at what happens when implied vol is mispriced during a market that was screaming lower technically:
500% on near the money index options? I specifically spoke about how weird this was yesterday, that the implied vol was higher on the call side and the market was technically breaking down. That is pure complacency, and they opened it lower and smoked those that were not prepared. Call holders, you held too long. And put holders, where were you? This should be a chart people follow, because it tells you when risk is elevated:
It is not a guarantee by any means that the market is in danger when the ratio falls this low, but it is part of the toolkit, like the MACD, RSI, 10 day crosses, VIX, etc.
Oddly, the futures opened one eye to check out the proceedings, which frankly were boring once the opening marks were set:
|VX Q3-CF||S&P 500 VOLATILITY||August2013||16:37:02||14.25||0.90||13.65||14.35||13.60|
|VX U3-CF||S&P 500 VOLATILITY||September2013||16:37:02||15.75||0.60||15.35||15.80||15.35|
|VX V3-CF||S&P 500 VOLATILITY||October2013||16:37:02||16.85||0.50||16.50||16.90||16.50|
I’ve mentioned many times over the last two weeks to get ready for this, that this day was coming. It always does. And the key was to do it from a low risk position, thus the Sep VIX $12 call and the UVXY call spread. The futures ETNs only had negative roll yield left in them, but even so, buying naked calls was not the play. The Sep VIX $12 had almost zero downside.
History shows tomorrow as very bullish – makes sense after folks have been shaken out of their derivatives, no? We will look at the Volatility Wave next week to see how September typically shakes out; should be very interesting considering the historical landmines.
Tomorrow a lower open will be nearly kissing the 50 day on the S&P, so maybe a short vol, long option trade may present itself. Using Aug4/Aug 5 weekly calendars may give you a nice way to expect a bounce over the next two weeks for low risk. Or even a diagonal. A SPY 169/170 will cost you a whole 6 cents and will pay handsomely on a bounce next week.
Considering the VIX term structure highlighted yesterday, I am less apt to short vol, but it certainly could work for tomorrow or next week’s expiration. VXX put calendar for example fits this strategy. Keep in mind the structure though, the VIX is not going to fall far from here.