As VIX Plunges, Goldman Correct On First Leg Of FOMC Knee-Jerk Trade; Will Its Other Prediction Of SPX At 1,125 Also Hold?
Yesterday Goldman recommended two trades on how to trade the post-FOMC trade: the first, was to sell vol. With the VIX plunging this trade is now solidly in the money. The second leg, the medium-term one, buying S&P November 1,125 puts, i.e., preparing for a subsequent market sell off, has yet to materialize. And with the euro now at nosebleed levels for Europe, expect to see some fireworks from Europe over the next few days designed exclusively to kill the EUR, send the dollar higher, and complete the Goldman trade. We are concerned what this may mean for the viability of Ireland and/or other peripheral countries.
"VIX Futures are at 24.3, a hefty 12 points
above or 2x the average realized vol level of 12 post midterm elections.
If the FOMC and election results meet expectations, we see a scenario
where implied vol could fall notably. We like using VIX options to
position in a limited loss fashion."
As for the subseqent reaction:
Expectations for QE2 and the election are high and fear as measured in
options has been cut in half. We analyze the “optimal put” to buy for
those who are fully invested, have participated in the recent market
rally, and are concerned that the Fed or the election may disappoint. In
a scenario where the market pulls back -2.5% by market close Wednesday,
the optimal hedge is buying SPX November 1125 puts for $6.6, in our
Keep an eye out on the S&P over the next few days as profit taking on In the Money VIX positions begins