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On Broken vol, Skew and Market Implications
As we pointed out earlier this year, volatility is broken. Due to different effects by the QE programs, volatility, and especially VIX, has behaved rather “strange” since the beginning of the QE programs. Many frustrated vol traders have experienced this effect during the last year, and will continue experiencing it until everybody is dragged into believing there is minimalrisk in the system. The skew has on the other hand traded somewhat differently, but it is not only an effect of “pro traders” buying protection, but we won’t go into those discussion here.
Instead are presented some charts on the skew (actually the skew in relations to VIX) and SPX index, courtesey of Macro Story. Are we up for some big drop in the Markets, or do we still need the last desperate Alpha chaser to join the bull run? One thing is for sure, not many, even of the experienced vol traders community, understand what is going on in the vol complex, and therefore we expect the unexpected to happen during the autumn.
For further reading on broken volatility and this year’s best vol report, Broken Vol.
Charts, Macro Story
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when a large tree comes down at 1st you may hear some cracking sounds as it begins to move slowly toward the ground, then as its gets closer to the ground it moves noticably faster just with lots of creeking and moaning, then you get the thud and debris flying as it connects with the ground. This market in the near future perhaps.
OK, I'll bite. Most of this is far above my pay grade, I did read the linked paper and understand some of it. I'll keep reading about this.
So.....is the normalcy bias being "helped" by the anticipation of QE3/OT2 whatever you want to call it, further dollar debasement? And what IF we don't get more asset purchaces by the fed of some sort?
Also, it has seemed strange to me that the very real potential of a US default has been "priced in." Hear/read this frequently of late. So ok, if it's priced in and happens, then what?
Is either a default and/or lack of more easing (both very unexpected..priced in "already") going to kill the market? I should think yes.
Thoughts?
when a large tree comes down at 1st you may hear some cracking sounds as it begins to move slowly toward the ground, then as its gets closer to the ground it moves noticably faster just with lots of creeking and moaning, then you get the thud and debris flying as it connects with the ground. This market in the not to distant future perhaps.
Something is brewing.
Broken Peak Everything!