Why Isn't VIX Spiking While Stocks Drop?

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by Tyler Durden
Monday, May 09, 2022 - 09:00 PM

Update (1700ET): As SpotGamma warned earlier, S&P's 4,000 level was in play as a serious threat to any downside and while S&P closed around 4,120 on Friday, few believed we would get there today, but we did... and closed below it...

Interestingly, while stocks puked their guts out, VIX underwhelmed in its spike-higher-ness, closing below last week's highs (as stocks closed below corresponding lows)...

Here is SpotGamma to explain why and suggest how today's close below 4,000 may trigger a capitulation that leads to a new VIX high...

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Nasdaq is now down 3% since Friday's rebound off-the-lows close, and down 9% in the last three days...

And the derisking of all equity exposures is dragging the S&P ever closer to the 4000 line in the sand...

All eyes are now on the large 4000 support area (total OI: 220k calls & 450k puts). SpotGamma has noted its significance for some time, as its the last strike with any meaningful call interest.

You may note in the image above that to the left of 4000 there is no call gamma at any strike (i.e. positive gamma bars).

The issue here for markets is a catalyst. Its clear that the reaction to the FOMC was negative as both stocks & bonds are lower (10Y yield touched 3.2% today). If the general market continues to liquidate we’re worried that the declines shift from something of a controlled demolition (i.e. fairly steady declines), to a limit down/capitulation type scenario.

Is it time for these two series to converge? The Fed flips less hawkish or stocks capitulate?

As we all know, not all flows are tied to options. If large equity liquidations persist to pressuring the S&P below 4000 – that will likely tie to a IV “release” which finally brings new YTD VIX highs and a capitulation type scenario. As below 4000 is purely put positions we think any options based support is fully eroded.

Here is a chart of SPY ATM IV going back to the Jan ’20. As you can see, despite the turmoil this year IV has been fairly contained, and uniform stock selling. A break of 4000 invokes larger short delta obligations on dealers due to “pure put” positioning <4000, and likely new IV highs.

Finally, we note that the 5/20 OPEX as a potential turning date, but that is still a full 2 weeks out. This is the first major area wherein options positioning may be a bullish catalyst for markets due to the expiration of large put positions.