The Bounce That Never Came

Frankly, we have so much material to cover – I don’t even know where to start. Last week’s wipe out has not just sent a shockwave of fear through the market, more importantly it has completely shifted the dynamics in equities and the prospects for the remainder of this year.

FWIW, we did see it coming and if you are a subscriber then you probably recall the chart above which shows us the CPCE’s stubborn gyrations around the upper 1.0 sell-off threshold. In my pertinent post I mused that the longer such a signal gets ignored the stronger the eventual correction.

Yeah, no kidding.

That said – despite ample warnings the option market apparently did NOT see it coming. And by ample warning I am specifically referring to the fact that after a half year long period of weekly expected move being observed the wheels started to come off in early January.

In case you care – this week’s calculated EM (based on the annual IV) is a whopping 103 points. Too little too late I’d say but nice try and thanks for playing.

That’s not to say that I am understanding the potential of more volatility ahead – this Friday’s expiration in the SPX is pricing in a 168 handle move via a 60+% implied volatility. Not bizns as usual I’d say.

What that means for you option slingers is that buying naked calls is absolutely off the table. If you must then buy an in/out spread and perhaps sell some far OTM puts.

Now many of you may arrive at the mistaken conclusion that an IV spike like this most likely correlates with a medium to long term low in equities. But nothing could be further from the truth…

Find out why below the fold where a plethora of charts await you.

That’s right jefe – a plethora of charts!!

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