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Options Skew, Another Canary In The Coalmine?

Tyler Durden's picture




 

Earlier in the week we highlighted a number of charts that indicate VIX (or short-dated vol) is under-pricing risk. The cheapness of vol has continued - especially now that Goldman has started to promote the buy-write strategy (offloading their positions?) that we felt was largely responsible for the rise in implied correlation (more macro demand for protection than micro). Today we look at what appears to be another leading indicator of stress ahead in short-term vol. The skew (or difference between an at-the-money option and an out-of-the-money option) 'measures' the market's comfort with normal risk (small moves) relative to more extreme moves - the higher the skew, the more concerned a market is at hedging extreme moves. Over the last few years, when the skew has spiked, VIX has been very close behind reflecting an underlying and consistent concern of tail risk juxtaposed with momentum chasing vol-premium gatherers in the short-term at-the-money options. Current levels of skew are the highest since early 2011 and as the chart infers, suggest VIX is due for a correction significantly higher.

Chart: Bloomberg

 

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Fri, 01/20/2012 - 11:09 | 2080978 LiquidityandLunacy
LiquidityandLunacy's picture

WE WANT THE DEER IN THE HEADLIGHTS!

Fri, 01/20/2012 - 11:15 | 2080997 ACjourneyman
ACjourneyman's picture

Risk, what risk. Ever since sears had trouble there stock has been on a tear, glad I am out of playing the casino.

Fri, 01/20/2012 - 11:29 | 2081046 5880
5880's picture

It's a binomial market, the increase of leptokurtosis always happens in a bear market rally

The guy who writes these is relatively new to options. This doesn't guarantee a vix rise (selloff). It didn't in late 94 early 95

Fri, 01/20/2012 - 11:42 | 2081083 disabledvet
disabledvet's picture

It did in 1987. Are you arguing for "Internet 2.0" in here?

Fri, 01/20/2012 - 11:56 | 2081133 5880
5880's picture

I was in the OEX pit in 1987

The Sep selloff, then snapback held the puts up. A lot of guys were looking for a selloff and got killed owning puts looking for a bigger downmove that came too late for them.

Again, I just don't think this guy really understands what he's writing about

Fri, 01/20/2012 - 11:39 | 2081073 nantucket
nantucket's picture

In technical stock market terms, the movement of a dead cat upon hitting the ground after a drop from a tall building does not mean it's alive.  SHLD is the cat, priced at $81 last October is the tall building, the recent $34 price is the ground.  The "movement" to $47 does not necessarily imply it's alive. 

But who knows, I could be wrong, it's happened before. Caveat emptor, your milage may vary, seek a doctor if you have an erection lasting more than 4 hours, yada, yada, so much and so forth.

Fri, 01/20/2012 - 11:12 | 2080981 Irish66
Irish66's picture

Waiting ever so patiently

Fri, 01/20/2012 - 11:19 | 2080986 Cognitive Dissonance
Cognitive Dissonance's picture

"Options Skew, Another Canary In The Coalmine?"

The light at the end of the tunnel is getting brighter. It must be the rescuers coming to save us. Horray!

Fri, 01/20/2012 - 11:33 | 2081055 tekhneek
tekhneek's picture

That's actually a train... sooo... yeahhh... 'bout that...

Fri, 01/20/2012 - 11:59 | 2081144 DeadFred
DeadFred's picture

The chart says the trains is months away, no worries. Algos have no understanding past the minute or hour level so the party will continue right to the edge of the cliff. Then they flip their switches to 'evil' and act like they knew the world was going to end all along. I suspect the Aprils highs will fall before reality hits but the roller coaster ride goes on.

Fri, 01/20/2012 - 11:12 | 2080987 GeneMarchbanks
GeneMarchbanks's picture

Ooops.

Fri, 01/20/2012 - 11:14 | 2080993 indianajohns04
indianajohns04's picture

Should have listened to ZeroHedge and not bought TVIX. But greed will get ya' every time It's been a rough two weeks..........

Fri, 01/20/2012 - 11:14 | 2080994 Cdad
Cdad's picture

Yep...and thanks to the various and absurd structure of options on options on top of options, near term VIX is as mispriced to risk as I can ever remember.

Anyone who thinks that a sub 20 VIX is "correct" considering the various current non market ponzi issues and global macro risks out there...needs to see a doctor immediately.

Fri, 01/20/2012 - 11:21 | 2081022 Cognitive Dissonance
Cognitive Dissonance's picture

Doctor, doctor, give me the news.

http://www.youtube.com/watch?v=ekoH1Et2Vls

Fri, 01/20/2012 - 11:32 | 2081048 Cdad
Cdad's picture

I'll give you the news:

Until such time as JPM, DB, CS, BAC, WFC, C, GS, MS are broken up, and their leadership dismissed, there is no fix for the current economic situation...globally.  The misallocation of capital, the continued violation of the once FREE market, means that the definition of insanity will continue to apply, that of doing the same thing over and over in search of a different result.

And as these "banksters" continue to ply their trade, capital formation, the only cure for the underlying economic disaster, will fail to materialize...and the Greater American Depression will roll on. 

And that being true, America continues to walk slowly toward its inevitable tyrannical and fascist dictatorship, its police state, and the death of its Constitution...all for the preservation of the financial services industry. 

I'm afraid the news is...terminal. 

Fri, 01/20/2012 - 11:45 | 2081095 disabledvet
disabledvet's picture

For whom? Them? Or us?

Fri, 01/20/2012 - 11:58 | 2081141 bbq on whitehou...
bbq on whitehouse lawn's picture

For "them", evolution doesn't allow for crutches. Money and power are vary large crutches.

Fri, 01/20/2012 - 11:54 | 2081126 Cognitive Dissonance
Cognitive Dissonance's picture

I can find no fault in your reasoning or logic. It is inevitable if we as a community, nation and world refuse to face ourselves as well as our tormentors and manipulators.

Fri, 01/20/2012 - 11:49 | 2081105 Dr. Engali
Dr. Engali's picture

CD your age is showing with that video :>

Fri, 01/20/2012 - 11:50 | 2081111 Cognitive Dissonance
Cognitive Dissonance's picture

I am rapidly leaving middle age behind my good friend. Here comes the golden years.......right smack dab in the middle of the greatest depression ever.

I was always very good with my timing.

Fri, 01/20/2012 - 11:52 | 2081117 Cdad
Cdad's picture

Right behind you, brother CD.  It's going to be one hell of a retirement.

Fri, 01/20/2012 - 12:00 | 2081149 s2man
s2man's picture

What retirement?  I don't expect to see that unless I win the Publisher's Clearinghouse sweepstakes.

Fri, 01/20/2012 - 12:10 | 2081200 ceilidh_trail
ceilidh_trail's picture

You trying to steal my retirement plan?

Fri, 01/20/2012 - 16:44 | 2082258 TheHillrat
TheHillrat's picture

My advice to hot chicks....Marry a rich guy, preferrably one that has an uzi to protect you with. 

Fri, 01/20/2012 - 11:53 | 2081119 Dr. Engali
Dr. Engali's picture

I'm in the same boat with you brother...age and timing .

Fri, 01/20/2012 - 11:50 | 2081044 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The VIX measures trader sentiment.  I don't know why you are all freaking out about.  I think, just as much as you, that risk isn't priced in, but obviously option traders think differently.  Market participants are, and have always been, like lemmings.  When there is big news (a black swan of sorts) then the VIX will jump, but not before then.  And the Central Planners will do what they can, as they have done, to keep a floor under the market.

"It's priced in."

Remember?

Fri, 01/20/2012 - 11:15 | 2080995 oogs66
oogs66's picture

vix is the "fear guage" and useful as anything only for idiots who want to waste a few minutes of time

Fri, 01/20/2012 - 11:15 | 2080999 Dr. Engali
Dr. Engali's picture

But,but the vix says everything is okay... You mean CNBS is wrong? Certainly not.

Fri, 01/20/2012 - 11:16 | 2081000 prains
prains's picture

Waiting for impact

Fri, 01/20/2012 - 11:16 | 2081005 trebuchet
trebuchet's picture

Es is north of 200 day moving averages - think " mean reversion/booking profits"

 

Fri, 01/20/2012 - 11:20 | 2081020 Cdad
Cdad's picture

As has been the case for many sessions consecutively now, there is viscous selling of individual equity positions despite whatever BS index level is being suggested by index ETFs.  The Street has been booking paper profits quite vigourously.  As such, the turn will come when they finally dump the ETFs...the synthetic "buyers" of all of Wall Street's crap.

Arbitrage anyone? 

Market structure is so broken as to be laughable...so roll on Greater American Depression...roll on.

Fri, 01/20/2012 - 11:18 | 2081012 DollarDive
DollarDive's picture

FED Swap Line Activity has increased significantly over the past 30 days.  

http://displacedema.blogspot.com/

Fri, 01/20/2012 - 11:19 | 2081014 Benedict Farse
Benedict Farse's picture

I'm loading up on volatility, more gamma than Fukushima.

Fri, 01/20/2012 - 11:19 | 2081017 LiquidityandLunacy
LiquidityandLunacy's picture

I am so long TVIX I feel like when Cramer yells at people for having all their holdings in one stock.

 

Of Course, I am long as of last night however :)

Fri, 01/20/2012 - 11:20 | 2081018 scatterbrains
scatterbrains's picture

another visualization for some additional perspective....

 

http://fiatflaws.blogspot.com/2012/01/putcall-relative-to-its-10-day-ave...

Fri, 01/20/2012 - 11:20 | 2081019 azzhatter
azzhatter's picture

I beg to differ. I watched CNBS and that mexican journalist financial expert Carl Quinzilla said everything is fine. Another journalist cum financial analyst cum economist Steven LIESman said Bernanke has everything under control and is "fixing" housing. I feel quite comfortable that everything is fine and there is little risk. I am really happy to have these journalists cum financial experts guide me. 

Fri, 01/20/2012 - 11:22 | 2081024 Dr. Engali
Dr. Engali's picture

Heh heh heh heh heh.......you said cum...heh heh

Fri, 01/20/2012 - 11:34 | 2081059 Squid Vicious
Squid Vicious's picture

Didn't the housing market bottom in Cramerica sometime in 2009? 

Fri, 01/20/2012 - 11:23 | 2081026 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

The volility has moved to gold.  We have been seeing dip patterns everyday (where a large sell is ollowed by a large buy).  This is extremely bullish as it shows that current demand can trump any exess of supply.

I am looking for a very large move in gold coming soon.

Fri, 01/20/2012 - 11:29 | 2081045 WonderDawg
WonderDawg's picture

Various TA says the large move will be to the downside. Not saying I agree with it, just pointing out the typical variance in opinion on everyfuckingthing these days.

Fri, 01/20/2012 - 11:53 | 2081125 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

meh....

so we will test $1550?  Fine, thats what?  A 6% move?  I could use more silver at $27.

Fri, 01/20/2012 - 11:24 | 2081027 NumNutt
NumNutt's picture

Let there be volatility in the markets, me and my money are sitting this out for the time being, now excuse me I need to go and run my fingers through my gold coins.....just because I like how it feels..........

 

Fri, 01/20/2012 - 11:23 | 2081029 RobotTrader
RobotTrader's picture

Heh, bears are getting blown out at almost every turn.

 

Basically most warnings are being ignored, any losses are always quickly recovered.

Just look at what happened to ORCL, TXN, ALTR after they warned.

NYSE Advance/Decline line is still making new 5 mo. highs.

http://stockcharts.com/h-sc/ui?s=$NYUD&p=D&yr=0&mn=8&dy=0&id=p70273094322&a=122406050

Yet the bears are still screaming

"Any Minute Now, I Swear!!"

Especially from guys like Jim "T-Shirt" Willie CB

http://www.youtube.com/watch?v=Cq1CbP-a2ao

LOL.....

Fri, 01/20/2012 - 11:28 | 2081039 somethingisrotten
somethingisrotten's picture

Blah, blah, blah, blah, . . .  FSLR NFLX  . . . blah, blah, blah

Fri, 01/20/2012 - 11:33 | 2081057 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

What about people that shorted SHLD?  RIMM?  EK?

Those bears did fine.  This market is relative not to macrodata because the data is skewed by central planning.  It is relative to individual corporations and how the HFT machines from hell will treat them.

Fri, 01/20/2012 - 11:46 | 2081099 trebuchet
trebuchet's picture

NYSE Advance/Decline line is still making new 5 mo. highs.

 

And has the world changed so much in those five months?

even a bull at some stage has to think about booking those profits. 

Fri, 01/20/2012 - 11:50 | 2081108 disabledvet
disabledvet's picture

This has been the best start to a year in over 20. And that is an historical move that has backing. Of course "sell in May and go away" worked pretty good last year as well.

Fri, 01/20/2012 - 12:04 | 2081168 OneEyedJack
OneEyedJack's picture

Robo,

 I enjoy reading your posts. I really am not sure if you are correct ( everything is fine ) or if collapse is coming this afternoon. I've been losing a lot of sleep over this.

 

 But I think the loss of sleep is because PM's make the mattress awful lumpy.

Fri, 01/20/2012 - 13:05 | 2081393 trebuchet
trebuchet's picture

toodays EUR$ / Gold correlation is scary.......   any thoughts?   anyone?

 

 

Fri, 01/20/2012 - 11:30 | 2081047 duo
Fri, 01/20/2012 - 11:36 | 2081065 Squid Vicious
Squid Vicious's picture

What about the blond whore drinking vodka with Captain?

Fri, 01/20/2012 - 11:55 | 2081130 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Captain eating dinner and having drinks with blonde after hitting land included!

Fri, 01/20/2012 - 11:56 | 2081131 Schmuck Raker
Schmuck Raker's picture

"She'll sleep with any man with a bottle, but she's good-people."

Fri, 01/20/2012 - 11:55 | 2081060 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Michael VIX Kennel Club

Fri, 01/20/2012 - 11:34 | 2081061 -1Delta
Fri, 01/20/2012 - 11:52 | 2081120 Burticus
Burticus's picture

Sure looks like a good historical correlation.  However, the daily & weekly VIX charts show various stages of death crosses of the ST moving averages down through the LT MAs.

Undoubtedly the VIX will spike, but you may be a bit early.  Be careful trying to catch that falling knife on leverage.  Plus, now one must consider the broad-daylight-bank-robbery of "segregated" (re-re-re-hypothicated) customer assets while the toothless lapdawg alphabet agencies look the other way like a referee on TV wrestling...

No, I think I'll just do the no-brainer simpleton thing and stack physical silver (& lead) on the dips, while watching the electronic derivative battlefield from a safe distance.  However, I trust ZH will remind me to "act surprised" when the derivative death star implodes and $#!+ hits millions of fans.

Fri, 01/20/2012 - 12:06 | 2081179 s2man
s2man's picture

+1 for the ZH will remind me to "act surprised".  My first laugh of the day.

Fri, 01/20/2012 - 12:08 | 2081186 Catullus
Catullus's picture

VXX calls look expensive. I think pigs are lining up to get slaughtered.

Fri, 01/20/2012 - 13:14 | 2081428 lilyvol
lilyvol's picture

can someone help me understand the chart tyler sent? I see the juxtaposition of the VIX on the SPX skew (and by the way when they say skew..are they referring to front month, second month, third month, and strikes is it 90-110 % or 80-120%).  And what does SKew 129% mean (in his formulation to get to that representation)?  What does that orange line represent?> Thanks!

Fri, 01/20/2012 - 13:21 | 2081454 5880
5880's picture

He is referring to Price Skew, not Time Skew

If Price is 100 and Vol is 20% at 100, skew is when the 80 strike is 30% vol and the 120 strike is 15% vol. The distribution is "skewed" to a negative return. The level of skew varies depending on sentiment (more or less bearish/bullish).

Vix is a bad guage of direction, low correlation. He is implying that because Skew is high we are going down. It's correlation isn't exact either.

Fri, 01/20/2012 - 15:26 | 2081950 vinayvad
vinayvad's picture

Agreed that the skew shot up, but there is seasonality to this SKEW Index. And close to 20th of every month the skew spikes up because of options expiry and the Skew index is rolled to the next month. Although the only interesting thing is that Skew has been rising consisitently through out Jan'12 when Vix was falling down. 

Fri, 01/20/2012 - 14:26 | 2081675 lilyvol
lilyvol's picture

5880 thank you for your response although I am very familiar with skew and what it means and how it is priced.  However through my charts and analysis when I look at the 90%-110% or the 80-120% relationship in front, 2nd, 3rd months..i do not see the relationship at a high point, thus the question?  Clearly Tyler has some formula in the orange line that I was hoping he could elaborate on?  Do you know how I can contact him directly?

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