The Market Has Never Been More Fearful Of An Extreme Event

Tyler Durden's picture


"There's something going on in derivatives land," is the warning from ADM's Andy Ash and as Paul Mylchreest notes the relationship between VIX and SKEW suggests the options market is pricing in the possibility of a major market event. The process enables professionals to maintain the illusion of calmness in VIX while hedging their positions (as they attempt to unwind as we have shown). Whether this 'event' is a crash or melt-up is historically unclear but given the taper and the trend of the last few years, we suspect the former more likely that the latter.


Via ADM Investor Services' Paul Mylchreest,

A rather thought-provoking chart which we've been looking at is the ratio of the SKEW (the chance of an extreme or outlier event, i.e. OTM versus ATM options) versus the VIX (the expectations for more 'normal' day-to-day volatility - the price of hedging implied by ATM options)... and is an indicator of how the market is pricing the possibility of a potential black swan event.

You can see how extended we are right now… (actually at record highs)


We can’t help wondering when Bill Gross tells the world that he is selling volatility, whether he is, in fact, selling ATM vol and buying OTM vol ???

While (curiously) 2000 didn’t register, the two previous highs in the SKEW/VIX ratio were 1994 and 2007 which turned out to be pivotal dates in terms of changes in market direction.

One up and one down... Which does it look like this time?

*  *  *

Think briefly about who is buying and who is selling? Thiunk about who is buying deep OTM protection? Smells like the professionals are a little less sanguine than their chatter suggests...

Institutional clients are dumping equities off to retail clients... thank you very much...


and those that can't dump their assets are hedging aggressively (while maintaining the illusion with VIX that all is well)

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Mon, 06/23/2014 - 13:38 | 4886173 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

The FED is either going to win or lose. I will hedge on the win and bet on the loss.

Mon, 06/23/2014 - 13:43 | 4886186 Arius
Arius's picture

"The process enables professionals to maintain the illusion of calmness in VIX while hedging their positions"

Talk about taking bullshiting to a new level ...

this market guy really has a nose for news, no need for inside information any more  .... just trust the market guy... BS to a new level

Mon, 06/23/2014 - 13:46 | 4886203 LawsofPhysics
LawsofPhysics's picture

For those not in the club (who are already on the lear jets going back into their gated communities in Montana or private islands);

"Don't try and interpret or predict this market, that's impossible.  Simply try to recognize the truth, there is no market for true price discovery"

Mon, 06/23/2014 - 13:52 | 4886218 pods
pods's picture

If the market is pricing in a black swan event, by definition that is not a black swan event.  


Mon, 06/23/2014 - 14:12 | 4886289 LawsofPhysics
LawsofPhysics's picture

Yes, the "unforeseen" event will only become clear after the fact (when two of those lines "recouple"- if ever).

Mon, 06/23/2014 - 15:03 | 4886488 WordSmith2013
WordSmith2013's picture

It doesn't get more extreme than this:

The BIGGEST Coverup in USA History


Mon, 06/23/2014 - 16:24 | 4886848 svayambhu108
svayambhu108's picture

Just like the Holliwood bear, hidding under the trees, this commet planet of yours will hide from the sattelites follow you until it kills you

Tue, 06/24/2014 - 08:24 | 4888692 TeamDepends
TeamDepends's picture

Planet X is the Derivatives Death Star.  And hey, what's that coming up over the horizon?  RUN FOR THE HILLS!!!!!!!!!

Mon, 06/23/2014 - 15:23 | 4886489 WordSmith2013
WordSmith2013's picture

There's also this:


Comet-Planet Identified, Orbital Trajectory Verified by Renowned Astronomer


Carlos Muñoz Ferrada: 
Single Most Important Video on the Internet




Mon, 06/23/2014 - 18:42 | 4887272 Overfed
Overfed's picture

An undetectable, hyper-dimensional comet-planet that is six times larger than Jupiter is coming to kill us all!!!! C'mon, dude.

Tue, 06/24/2014 - 07:37 | 4888621 shovelhead
shovelhead's picture

Knock knock.

"Who's there?"


Tue, 06/24/2014 - 00:25 | 4888273 adr
adr's picture

The sun most likely has a small brown dwarf companion star orbiting unseen. Almost all stars are part of a binary system. However it would never enter the inner solar system. It could however come close enough on an elliptical orbit to cause material in the Oort cloud to dislodge and head inwards towards the sun.

New comets would enter, essentially a comet storm. The outer planets would take care of most of them, perhaps becoming new moons if enough material is available and condenses around an orbit. Perhaps a few would make it to the inner planets, maybe hitting the Earth. Could be the cataclysm that turned Mars into a dead planet.

This is the plausible scenario, if it exists. The companion star would remain billions of miles away and never be seen. Only its gravity would be detectable. Even so we would probably never detect it due to the cycle unfolding over millions of years, the deviation from the baseline would be too small to detect over a few decades.

The point is if a dwarf star does exist, there is nothing we can do about it and there isn't any way of knowing if it would cause a catastrophe. The polar shifts have nothing to do with Planet X but a natural effect of the Earth's rotation and core. The polar reversals happen mutch shorter intervals than the supposed effects of the eliptical orbit of a companion star. Polar reversals have been proven, the companion star is still a fringe theory.

Mon, 06/23/2014 - 14:55 | 4886450 debtor of last ...
debtor of last resort's picture

Pods, there are no black swans. Central banks, isda, shadow buyers (Belgium), several PPT's are watching markets closely. Everything is papered over, until the larger public throws in the Spiderman towel.

Mon, 06/23/2014 - 15:22 | 4886547 BanksterSlayer
BanksterSlayer's picture

ditto ... Jim Rickards says if you can see an event coming, that is not "the" event that will take out the market. Events that you can see can always be dealt with or manipulated into some illusion of submission.


Mon, 06/23/2014 - 23:59 | 4888234 Godisanhftbot
Godisanhftbot's picture

A White Swan  that needs a bath?

Tue, 06/24/2014 - 00:43 | 4888308 pakled
pakled's picture

I call these brown swans.

Mon, 06/23/2014 - 13:59 | 4886242 Amish Hacker
Amish Hacker's picture

Please, a Lear jet is so 1%. Join the .01% and treat yourself to a Gulfstream G650ER (

Mon, 06/23/2014 - 14:49 | 4886417 Save_America1st
Save_America1st's picture

yeah, well some of those .01%'ers just might not be as safe in their luxury Gulfstream jets as they think they are. 

This guy got wacked harder than a banker with a loaded nail gun!

Kinda similar to the way Hastings was taken out, don't ya think?

Mon, 06/23/2014 - 15:04 | 4886490 Eirik Magnus Larssen
Eirik Magnus Larssen's picture

You're referencing the Daily Mail. Your argument is invalid.

Mon, 06/23/2014 - 15:49 | 4886686 OceanX
OceanX's picture

Travolta has a 707:

I think it even has a dance floor and disco ball!

Mon, 06/23/2014 - 17:44 | 4887130 Amish Hacker
Amish Hacker's picture

And, unlike Hastings and Katz, he's stayin' alive.

Mon, 06/23/2014 - 17:44 | 4887129 MeelionDollerBogus
MeelionDollerBogus's picture

Never underestimate the power of magnetic trees.

Mon, 06/23/2014 - 14:10 | 4886285 JRobby
JRobby's picture


Mon, 06/23/2014 - 14:50 | 4886427 Truthseeker2
Mon, 06/23/2014 - 15:03 | 4886484 WeNeedaRealGovt
WeNeedaRealGovt's picture

Breaking news - ZHer-r-r-rs still run of the mill GOPTEAs.

Mon, 06/23/2014 - 17:41 | 4887121 John_Coltrane
John_Coltrane's picture

Only if his life insurance policy, Joe Biden, goes first!

Mon, 06/23/2014 - 17:38 | 4887113 MeelionDollerBogus
MeelionDollerBogus's picture

"But what's really going to bake your noodle is, if I hadn't told you to watch out for the dropping price of silver when you bought some, would it still have dropped?
Have a cookie, you'll feel right as rain"

Mon, 06/23/2014 - 15:41 | 4886632 midtowng
midtowng's picture

The smart money is selling and the dumb money is buying. We must be near a top.

Mon, 06/23/2014 - 14:31 | 4886364 zaphod42
zaphod42's picture

There will either be inflation or deflation.  Unless, of course, prices stay the same.  

What we are seeing is all smoke and mirrors.  The whole thing is rigged, and you and I don't have a clue.  Meanwhile, distractions abound, and anyone with a clear mind knows this entire edifice is going to implode any moment. 

Good luck in the casino on Wall Street.


Mon, 06/23/2014 - 15:41 | 4886629 disabledvet
disabledvet's picture

Any formula based upon the assumption that inflation will be the bail out is inherently flawed.

The goal of QE was to create inflation or "stimulus"...yet as soon as even a whiff of inflation appeared (just last year) the Fed announced the end of QE. So for sure...the USA got hit with a huge inflation last year...but simultaneously prices for raw materials collapsed.

The dollar moonshot...the economy has contracted...and the "theory" is that "if only we had stayed the course." The fact of the matter is the Fed is now unwinding QE...and as it does so the train wreck of the American economy is revealing itself.

I want to sell out of that treasury position but I just can't bring myself to because it so plainly fits the data. Namely "recession with a massive over extension of credit." In short inflation leading to default leading to a price collapse.

In debt.

I think where the real leverage problem is "from within the Bank" is in the basis trading. The Bank is trying to widen the spread in order to "create" growth (liquidity to be used to buy back stocks, buy Alstom, take Coke private!)...but this is generating huge profits for Wall Street but with no recovery in sight putting a veritable potpourri of financial instruments and even entire Government Agencies "in the wood chipper."

"Just in time for World War III" it would appear.

Mon, 06/23/2014 - 13:38 | 4886175 Shizzmoney
Shizzmoney's picture

This is all subterfuge. The Market needs to realize they have one more year of DOW, S&P, and RUssell to infinity.

August 2015, when the debt ceiling stuff comes up again, is when the *real* fun begins (bondzilla)

Mon, 06/23/2014 - 13:47 | 4886205 AccreditedEYE
AccreditedEYE's picture


Mon, 06/23/2014 - 14:05 | 4886246 LawsofPhysics
LawsofPhysics's picture

Is that when the Fed finally "untapers"?  I simply don't see it.  The energy producers really seem to be forcing the central bank's hand here.  I simply see a slow but steady decline the global standard of living from here on out (barring the application of function fusion reactors to power cities of course).

Tue, 06/24/2014 - 22:29 | 4891878 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

What proof is there that the privately held federal reserve is really tapering?  Oh!  They told us they were.



Mon, 06/23/2014 - 14:03 | 4886259 buzzsaw99
buzzsaw99's picture

bondzilla is a myth

Mon, 06/23/2014 - 14:32 | 4886314 Dr. Engali
Dr. Engali's picture

Please. How many debt ceiling 'crisis' have we seen over the past few years? The next one will pass without incident as well. 

Mon, 06/23/2014 - 13:39 | 4886177 Top Gear
Top Gear's picture

Get In There, Mortimer, and Buy!

Mon, 06/23/2014 - 13:40 | 4886179 fonzannoon
fonzannoon's picture

the only "extreme event" that can take down the market is actual growth. anything else will be greeted by btfd.

Mon, 06/23/2014 - 14:16 | 4886290 Dr. Engali
Dr. Engali's picture

We are on a permanently high  plateau. Growth would be celebrated by BTFATH. Take the blue pill Fonz. The steak is juicy and delicious.

Mon, 06/23/2014 - 14:33 | 4886365 fonzannoon
fonzannoon's picture

I'm with you. I am all about the world cup and enjoying the tranquil markets. What could go wrong?

Mon, 06/23/2014 - 15:25 | 4886558 thamnosma
thamnosma's picture

I can't recall any extreme events in the recent past, so I think we're good to go.

Mon, 06/23/2014 - 13:40 | 4886182 hegemony
hegemony's picture

Does anyone know what time the market opens today?

Mon, 06/23/2014 - 14:46 | 4886414 dontgoforit
dontgoforit's picture

The market is closed today and tomorrow.  Yes we have no bananas.

Mon, 06/23/2014 - 14:58 | 4886468 debtor of last ...
debtor of last resort's picture

Not in your lifetime bro.

Mon, 06/23/2014 - 15:44 | 4886662 MeelionDollerBogus
MeelionDollerBogus's picture

We have markets?
I know there's prices, I know they're pushed by central banks & their minions, but markets?
I didn't think we had any of those left.

Mon, 06/23/2014 - 13:41 | 4886184 LawsofPhysics
LawsofPhysics's picture

Odd, that's not what the VIX is saying...

Mon, 06/23/2014 - 13:54 | 4886228 credittrader
credittrader's picture

Read the post again. VIX is more applicable to 'normal' day-to-day vol and hedging... SKEW (or OTM vs ATM vol) indicates 'fear' of considerably larger moves (and signals how far away from B-S normality options markets expect events top unfold)... so VIX can stay low as fear rises in the extreme snowing the standard investor who relies on VIX for his fear (or complacency) indication. Of course, there is a limit to the steepness of the vol skew before it bleeds into the ATMs (and thus VIX) but we are not there yet.

Mon, 06/23/2014 - 13:56 | 4886235 LawsofPhysics
LawsofPhysics's picture

Thanks captain obvious. (FYI, it's called sarcasm)

Mon, 06/23/2014 - 16:37 | 4886904 credittrader
credittrader's picture

LMAO - sorry mate.

Mon, 06/23/2014 - 14:49 | 4886422 NotApplicable
NotApplicable's picture

And if people start paying too much attention to SKEW, it'll just have to be managed like they do the VIX, by manipulating the inputs until the output looks good.

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