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Some More Forward Risk Arbitrage
VIX-VXV hits steepest levels in a long time. Short-term vol being driven down by dispersion traders (selling correlation), cyclical/seasonal pressures, and risk transfer. Then again all these synthetic risk measures are likely screwed up beyond belief.
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I love this trade and think it's setting up for a big pay day in months ahead, most likely after attrocious holiday sales after Thanksgiving. We are buying SPY puts with 6 handles on them out at and past Decemeber for ridiculously low IV. One big down move and a spike in VOL could really reap an handsome reward because the positions right now are dirt cheap to get into. I dont know but something tells me going back to the lows in the S&P500 or even a 50% increase in the VIX is much more likely than the implied standard deviation move that the IVOL would suggest. I guess time will tell.
Presenting a simple thesis: while dispersion trades and otherwise selling index volatility is probably driving some of the dynamic, there is also little retail buying or selling going on outside of roboworld. I count this lack of selling to be a function of the implicit backstops that we've seen for a while now. So yes, it's screwed up based on info flow.
And I agree, it's VERY cheap. When the backstop dies, I'm going to laugh my ass off.
What Strike price on SPY puts aryou thinking? quote for X = 76 is 2.45-.56!
How about put options on OEX? Would that behave differently?
Then again all these synthetic risk measures are likely screwed up beyond belief.
They are, the only players right now are the smart money pools which are almost always short vol. And they've made a killing since March. With hardly anyone on the other side of the trade, this is the canonical Taleb Black Swan set-up -- the one he used when he was on prop desks -- where vol is systematically underpriced and stays that way for a long time. In such situations, you have two options, bleed or blow-up. Long vol means bleeding until you're right, and when you're right, you're right big. The alternative is to collect premium, make nice, steady returns until some 6-sigma event blows you up. Let's hope you got your VaR right, otherwise it's bailout time.