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Volatility Thoughts

Volatility Thoughts

by MoleSeptember 21, 2011

I am not doing much due to Mr. Bernanke.

Here is a bunch of data on option implied data.

First lets look at IV for multiple markets.

So this just shows 2 things. (1) Gold and Oil have made new IV highs. This just simply means that volatility is not likely to go away in those markets. (2) it shows how extreme the Russell was.

Oil and gold IV breakouts probably support the idea that IV will stay elevated in those two markets for some time.

To clear this chart up, I indexed the data. This just show how IVs are high or low relative to their October 2008 values. To me it shows how much the EUR has stayed elevated.

[amprotect=nonmember] More of Volar’s charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero or Geronimo subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
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This also shows the EUR divergences.

IMO if EUR or Russell IV make new highs we will have a serious problem on our hands. I will be watching those levels very closely. I say that because, the flash crash resistance was upheld. If the take were to be taken out, I think we would be in a similar situation to 2008 when the VIX broke out.

Also lets look at the Implied Correlation Index. It looks to have evil usefulness. The implied correlation index (found here) is a different measure of option IVs. Think if AAPL has an IV of X and MSFT has an IV of X, if the IV’s are high enough the prices “distributions” MUST have an expected tendency to overlap. Or in other words it is a breadth indicator for IV amongst the stock market. So in general, the higher the IV amongst stocks, the higher implied correlation.

Now I have seen much chatter about the implied correlation index divergence with the VIX. There has been divergence 3 times.

Well here in my guess- POMO expectations.

Well this states the obvious. The market is expecting POMO. POMO keeps the high beta correlation trade going (just upwards, not downwards). So go figure we add a few billion here and there and stocks tend to be correlated.

And FWIW I do think this index does give good short-term sell signals.

Finally, the SKEW and contango of the VIX…. consider this.

So what is the bottom line?

The market is expecting a BIG QE (of some sort). If we do not get it, I think things will end badly.

-Best of trading,


About The Author
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.