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- The Day the VIX Doubled
Good Morning!
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Quote of the day:
"Expect the unexpected"
-Fauci’s riveting book
Although, the dago doctor probably wasn’t caught too off-guard… (especially since the US had funded some “gain-of-function” research back in the day…you know…in Wuhan.)
On the other hand, this VIX pop actually came out of nowhere!
Monday marks the 5-year anniversary of the day the VIX doubled, February 5th, 2018. Some refer to that day as “Volmaggedon” which is the combo of volatility and Armaggedon. And yes, COVID made the VIX do even crazier stuff, but this one was unprecedented at the time.
You may be thinking, “dumb@ss, Feb 5th was last week!” True…but a key component of this event was it occurred the day after the Super Bowl!
Lots of half-drunk, sleepy traders that morning, and also a few “risk managers” who may have scurried out of the office a little early on Friday while barely glancing over the exposure reports.
The market always finds a way to take you by surprise.
VIX on Volmaggedon
The VIX went from under 18 to over 37 in a matter of hours.
Volatility Is Mean Reverting
It sure is, but you have no clue on how far it can get away from the mean before it reverts! All the fancy models in the world will not stop a good old-fashioned panic. And just like in poker, at some point you are playing “the person” not the probabilities.
Some massive volatility players tried selling VIX all the way up…and yep, the market can remain irrational longer than you can remain solvent…even if just for a few hours. The market knows how to find max pain, and in this case, short volatility players literally squeezed themselves as they ran out of collateral. So, they literally had to buy back the crap they just sold and realize massive losses.
As you may recall from The Noble Pursuit of Price Discovery, this was a prime example of “find some @sshole and bury him!”
2018 had a nice theme of catching the market off-guard on days that should’ve been “quiet.” On the half-day trading session on Christmas Eve, the market sold off 5% in under 3 hrs., because why not?! And that’s usually how it goes.
It doesn’t matter what caused this. It matters how you predict others will react and place your bets accordingly. That’s trading.
BANG for Your Buck:
| 2/10/2023 SPX = 4081.50 | Handles of Movement | Implied % Move |
|---|---|---|
| BANG (intraday) | 53 | 1.3% |
| BANG (weekly) | 117 | 2.9% |
The BANG has been creeping up all week, and so has the skew. It appears that people are starting to buy some 3-to-6-month hedges in equities. Nothing massive yet, but we’re starting to see some ripples.
Large Option Positioning
4200 strike creates large positive gamma for dealers and will act as resistance above and a magnet below.
Staying above the 4100 strike is critical support and perpetuates the bullish lean.
You are here: A breach of 4100 will likely test the option support at the 4000 level. And recalling the Feb17 24k 4050 Put trade, as the market gets closer to the strike, dealers will need to hedge by selling futures, thereby adding to momentum. If the customer liquidates that put for a profit next week (I don’t suspect this to be the case since it’s an option on futures, not cash settled), dealers will need to buy back a bunch of futures.
3900 strike creates large negative gamma for dealers, which will exacerbate movement near there. In general, a break under 4000 gets the dealers to start hedging with the direction of the market and a pop in volatility.
"Downside protection" i.e. puts, are starting to come up in value a touch…they are ~2% more expensive than last week, but still priced historically cheap. But remember, there's a sh*tload of liquidity in ultra-short dated options, and as long as the marketplace can take these bets, what's the real need for longer dated hedges? Why not just wait until you need to buy the insurance?! (FYI, this works until it doesn't!!!)
VIX Trades: early this week, large trades occurred that essentially bet volatility will go up precipitously (50% to 100% higher from here) into March. FYI, with the current stance of option open interest, volatility can't really increase massively until the SPX is under the 4000 level.
News/Reports
Super Bowl Sunday
The next big "number" is Feb 14th CPI (i.e. is inflation getting better or worse)
VIX expiration Feb 15th.
Largest February OpEx (options expiration) on Feb 17th
Generally, VIX and option expirations clear the decks. The money tied up from prior bets are freed up, and ready to deploy within a couple days after expiration. This usually refreshes and/or changes the dealer hedging feedback loop.