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Volatility Divergence
The VIX is hell bent on demonstrating it can go back to under 10 even as bond vol keeps on calling its bluff. However, someone keeps selling vol in wholesale amounts and reraising all in (the 5th round has been, of course, with taxpayer money) on stable market bets despite all fundamental signs to the opposite.
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banks are selling their tarp warrants... the brokers buy them, and use the SPX to hedge the vega exposure, as the individual bank vol markets are not deep enough. size vol for sale (as a hedge) so the VIX stays low.
I like your reasoning. But I'm afraid it's over the heads of 99.99% of the people who post here.
You would be surprised by who posts here.
Just started using this page. I think the original blog page was much better.
This new version is good enough. Not perfect, but gets the job done.
good finance articles
Tyler,
"Volatility at the index level is a joint function of single stock volatility and the correlation among the stocks. A higher degree of correlation among the stocks leads to a higher level of index volatility as the risk reduction normally achieved from holding a portfolio of stocks
becomes limited by the similarity of the stock returns.
The degree of correlation among stocks is in the macro component. Factors here include broader risks such as monetary policy, the economy and the geopolitical
landscape.
In equity derivatives, risk indicators like strike skew, implied vol of vol, and termstructure, all reflect an increased appreciation for market uncertainty."
- From Banc of America Securities - 2-2007 Equity Derivatives and Outlook
-PropDres
What surprises me is that big fish are happy to sell index vol when they KNOW there is a positive risk they won't be able to offload their trash onto somebody else. I suppose it's a given that the Fed will just drop the chum bucket some more if they lose this round.
An interesting tangent of this VIX behavior is the presence of model risk in hedge strategies. There is a divergence in implied versus realized. Over time with leverage this could grow geometrically. You might see more strange days like July 15 when risk management rebalances when the market doesn't move as expected.
"What surprises me is that big fish are happy to sell index vol when they KNOW there is a positive risk they won't be able to offload their trash onto somebody else."
it's kinda like you were saying. if it's not their money they're playing with, then why should they care? they'll keep raking in their high-frequency commissions in the meantime.
WYNN racing LVS - with the prodding of JPM, ML, and GS - to see which one can IPO on the top of an even bigger bubble than the US Stock Market. Wait up, Hong Kong!
http://www.reuters.com/article/marketsNews/idINHKG10294520090721?rpc=44