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Thrilling Implied Volatility
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Thrilling Implied Volatility

by The MoleApril 11, 2017

Apparently the odds of seeing any type of resolution before the long Easter holiday weekend are low (what are the odds I will eat my words on that one?). Which gives me an opportunity to dazzle you guys with some rather thrilling implied volatility (IV) charts. So strap yourself in and make sure you do not extend your hands or legs outside the carriage until the ride has come to a full stop.

2017-04-11_SKEW_useless

To set the stage we’re going to first talk about a pertinent chart which was originally designed to be of value to traders but thus far at least has failed to live up to its lofty promises. Of course I’m talking about the SKEW, which in my opinion (and that of many others) is only useful to a small group of professional hedgers <shameless-plug> and even those would be better off signing up here at Evil Speculator</shameless-plug>.

The CBOE Skew Index was introduced in 2011 as an index derived from the analysis of the IV smile produced across a range of deep OTM S&P 500 options. SKEW is intended to show us the extent to which investors expect a deviation from security returns, i.e. how much the distribution shows us more extreme outliers. A reading of 100 indicates a normal distribution and the higher the reading the more skewed to the right of the mean traders expect risk based returns to be.

In reality however what was intended to be a leading/predictive indicator turns out to jump a bit all over the place as is easily visible in the chart I posted above. I actually had to smooth the damn thing with an SMA(5) to show you a representation that made any sense at all. I inverted it actually so that it would follow price and as you can see the spikes toward the lower (which is actually the higher) range seem to be intensifying and have been for several years now. That is concerning as apparently post 2008 the perception of ‘tail risk’ continues to grow the higher we go. Perhaps that is also one of the underlying reasons of why so few retail traders managed to participate in one of the most profitable bull markets in history.

Or perhaps that is the very reason why the market has kept bubbling higher – now that those annoying retail rats are gone the institutional players are free to drive up prices into the stratosphere. Okay, I’m kidding of course – or maybe with I’m half serious with a wink 

There are many theories out there as to why it is broken and most of them would put you to sleep. My contention is that it may just be the the formula. Because some of my own measures are fairly related but seem to work quite well. Let’s take a look but before we do a quick pointer. IF you are not familiar with the differences between the CBOE’s VIX, the VXO, the VXV, the SKEW, etc. then I strongly urge you to point your browser to one of my older posts on the topic that should sort you out in no time.

2017-04-11_VIX_VXO_Divergences_LT

Alright here’s a brand new look at the VIX:VXO I put together just earlier today. As you can tell it’s a long term chart and thus it’s not something you want to be basing your long put positions on. However what it does for us is to highlight times when the probability of a medium term corrections (in terms of weeks of price action) is high. I think the divergences I drew are rather clear and do not necessitate further explanation.

2017-04-11_VXV_VIX_Divergences_LT

The version I actually prefer is the VIX:VXV but I would probably use both in conjunction in order to make sure to increase the chances that a more profound correction is pending. Here apparently extended divergent periods seem to produce more amplified price corrections. Of course it may take several weeks until price finally responds in kind. Incidentally note how there is now a a pretty solid signal divergence in place, which either means that VXV has risen against the VIX or that the VIX has fallen against the VXV. A quick look at the VIX shows it rising right now so my money is on the latter.

2017-04-11_VXV_VIX

Now here’s another view on the very same ratio and one you may remember from previous momo posts over the past few months. As you may recall my expectation is a first spike lower  (which seems to be in progress) followed by a retest recovery and then followed by the real massive drop taking us way past the previous lows late last month.

Caveat: This is no exact science of course but given the current magnitude of the drop in ratio compared with a rather muted price response I believe the odds are high that this has just been the overture to something much bigger.

2017-04-11_VIX_VXV

Again the same ratio but on this chart it has been inverted (VIX:VXV). As you can tell there’s less smoothing here and I’m looking at thresholds. If we spike above the upper (green) line then buying potential is high and of course the inverse with a drop below the lower red line.

The center line is also useful it apparently marks moments when the odds of an impending correction appear to be rising. Whereas a drop below the red line tells us that easy time is over the center line for me is the point of recognition. Something is looming ahead and it’s probably not accompanied by sunshine and spiked drinks adorned with small umbrellas.

Now that I have your attention let’s get to the really juicy stuff:

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About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • http://thebhbgroup.com TheBHBgroup

    Very happy I am back here!

  • http://evilspeculator.com Sir Mole III

    Well, why did you ever LEAVE?? 😉

  • BTrader

    Top secret but now I have the money and the power…working on the last part….:)

  • http://evilspeculator.com Sir Mole III
  • ridingwaves

    everyone waiting to see if 2340 breaks…their on the edge folks….XLF drop below 100 sealed the deal a move to 23 with earnings season kicking off and couple money centers reporting Thursday…

    whoops there it goes

  • OJuice

    Second half of April favors the upside according to http://charts.equityclock.com/sp-500-index-seasonal-chart
    Lots of bearish sentiment here. Personally I’ll be looking for /ES to catch a bid sometime today for an entry. Looks to me like a back test of the lows from the end of March.

  • Darkthirty

    Bounced off the trendline from 1/23/17

  • ridingwaves

    I’m thinking the same…XLF has come off lows but it could find its way to 23-23.15
    JPM, CITI, WF and couple other banks reporting thursday….VIX close below 15.20 will help here

  • Mark Shinnick

    Exited long miners, for the time being.

  • evilasevildoes

    30 day wek month 45 day wek month off of june 23 aug 7 2016 and jan 20 2017 mercury retrograde major short squeeze for last jammituptheir youknow what and they sell the bonds they got they cheap…..oil is anyones guess…25 or 75

  • CandleStickEmUpper

    I havent been too active on this board however been reading Mole’s posts every day. Yesterday the zero signals helped me bank NQ points both short and long. Been leaning NQ short for the last two weeks, finally seems like we’re making some progress to the downside. However based on Mole’s readings above in today’s post, a sharp rally for a bigger drop is ideal. Will play what I see. Happy trading to all here.

  • BobbyLow

    They are a much needed cool drink of water in the desert for me today. :)

  • Mark Shinnick

    Yeah, that was a rough little patch recently.

  • evilasevildoes

    look at SIL

  • ridingwaves

    United airlines training video
    https://www.youtube.com/watch?v=rVQcXR2HVhw

  • StockTalker

    /ES 2340 is a tough nut to crack ATM.

  • Mark Shinnick

    Yes, sector properties appear very similar, all remain poised against rates and the $

  • Yoda

    There is a divergence between GC and miners. GC making new highs for the year whilst miners are lagging behind. Arbitrage anyone?

  • Mark Shinnick
  • ridingwaves

    If I wasn’t using them for part of my upcoming trip I would never fly them again…they could have rented a jet to take the crew members to location and saved billions….I don’t think this incident is going away soon, that guy will make a lot of cash…

  • Mark Shinnick

    I guess he’ll end up against the insurance company. Even with how decency has devolved in recent years, hard to imagine this does not kill off the brand.

  • evilasevildoes

    blame mercury retrograde 80@ higher are stats in this config fwiw

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    over 3 years to find it’s a dry hole. {sigh}

    no edge. Still, a nice line in the sand.

    BPCOMPQ
    https://uploads.disquscdn.com/images/a9ce86ca943a8eb41543ce6b368101a15896452d59b16cd75a1a7613c7dd06b2.png
    -GG

  • Darkthirty

    Try dating 50 year olds, ya get used to it………..

  • Darkthirty

    Got a gap at 20658 DJI

  • ridingwaves
  • Mark Shinnick

    Short miners.

  • Darkthirty

    Yup, just saw 7 of em, with a hot brunette!

  • Mark Shinnick

    Tight stop, too.

  • ridingwaves

    did she have snow white skin?

  • Darkthirty

    I’ll bet

  • Darkthirty

    Didn’t lift her skirt to check

  • Darkthirty

    Full moon this morning too

  • ridingwaves

    entered SAEX on offshore drilling rollback possibility, very small float….sure to feel crowded if rumor holds…
    stop at 5.10, hourly compressed…9.00 target

    https://s11.postimg.org/m97zv5jjn/SAEX_tight_as_a_babies_fist.png

  • Mark Shinnick

    Stopped some time ago…see what happens.

  • http://evilspeculator.com Sir Mole III

    Well done, GG. At least now you know and you move on. Should have done this three years ago!

  • http://evilspeculator.com Sir Mole III

    Well done mate – your presence has been missed!

  • Darkthirty

    Got an iffy short ES signal too

  • http://evilspeculator.com Sir Mole III
  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    Volar taught me to have a N sample size of 10 for statistical confidence.
    =P

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb

    Buwahaha.
    I like this guy.

    miners get spanked now and then.
    😉

    https://i.ytimg.com/vi/Tm96ui2pYhA/hqdefault.jpg

  • http://evilspeculator.com Sir Mole III

    Zero snapshot. At this time the best way to describe this tape is fragile/volatile.

    https://uploads.disquscdn.com/images/d24494b0c05b5ddfee4423e51c2009d96690c996bf844921a3eecfb8a5c87267.png

  • Darkthirty

    That’s her, heard she’s got a dust addiction

  • ridingwaves

    go avxl….push thru and find your place in the 8’s…

  • OJuice

    Do you usually close your entire position in trades like this? Or close a portion and let the rest run?

  • Mark Shinnick

    As far as I see with 3x miners, it looks to be important resistance for shorts in this zone. I’m short.

  • http://gerb-reloaded.blogspot.com/ Gold_Gerb
  • BobbyLow

    You have a very fast time frame and resistance is a relevant term. I’m not saying that it’ll get there but NUGT was trading in the 13’s in February. I have a prettty wide stop based on my hourly that would still be in profit if I get stopped. If and when I get stopped, I’ll flip and the beat goes on. :)

    In the mean time, I got taken out of my Silver short -.74 R and flipped over to the long side. A few days ago I mentioned that I was on such a hot streak that my streak would have to cool off and it sure did. But this is part of the game. . .

  • ridingwaves

    closed vix below….now for move north….

  • http://evilspeculator.com Sir Mole III

    Listen guys – I ask everyone to pay close attention going forward as the potential for large moves are increasing by the day. Not going to repeat myself and once it is happening it will be too late to join the party. So show up for work every day post Easter holidays!

  • http://evilspeculator.com Sir Mole III

    I always hated that fucking airline. Not one of their flights I’ve used was ever on time.

  • yudhisthira

    Yessir

  • http://evilspeculator.com Sir Mole III
  • http://greenlander1.blogspot.com/ Greenlander

    went long XBI today. will take a look at SAEX, someone mentioned DO on another site for drillers

  • http://greenlander1.blogspot.com/ Greenlander

    AVXL chart looks interesting. SAEX I can see what you are looking for but too speculative for even me. I was looking at BLUE, MYL, REGN and just decided to get XBI in the end https://uploads.disquscdn.com/images/534e1a89624e5fa9db6dc7096038dbb524be6237adf21e847223f115e6780a01.png

  • http://greenlander1.blogspot.com/ Greenlander

    Got only the 4th VXX short signal in the last yr. took 1/2 position via May puts. Not as robust as the pre-election set up though. https://uploads.disquscdn.com/images/96fda245736b2523a9ca07af51e7ba7f525170164112124a66008804febc4e9b.png

  • http://evilspeculator.com Sir Mole III

    I would wait until after re-entry.

  • ridingwaves

    Noble upgraded to strong buy at 15, I’m just following the trend up with trailing stops…disclaimer I scaled in at 4-5.50 range…
    SAEX is speculative to the max….but they have earnings and 2 million float with big institutional ownership….its getting close to launch….so stop is wider…

  • http://greenlander1.blogspot.com/ Greenlander

    yeh if SAEX makes a move it could be a ridiculous one!

  • http://greenlander1.blogspot.com/ Greenlander

    hey RW what’s yr email?

  • Darkthirty

    Screwed that up, turned at 2352

  • ZigZag
  • Mark Shinnick

    This tends to be fully completed short term sniping upon 1 or 2 day price objectives in the 3x miners. Its evolved that way because I could never seem to hold a PM position through whole multi-week/month trends that all seem to be rich in shorter term setups that often reversed against the trend. Personality has a lot to do with all this because its those shorter setups formerly so vexing to me as a lazy trend seeker that I happened to end up loving for their more-frequent financial violence and demand for technical execution.

  • OJuice

    Came early to work. Boss was late…

  • http://evilspeculator.com Sir Mole III

    I do have an excuse however – please see my next post 😉

  • http://evilspeculator.com Sir Mole III
  • http://evilspeculator.com Sir Mole III

    All good things take time…