VIX Options Volume Hits Record High As Equity Correlation Flashes Red

Traders bought and sold an all-time record high 3.15 million VIX options on Friday (as 'elephants' and '50cent' re-emerged) amid the Ross Rout and North Korean shenanigans.

 

But as that volume explodes through the derivaties market, risk and the underlying have notably decoupled...

Several explanations are plausible:

1) a cautious, pessimstic one - demand for downside protection picking up as stocks go parabolically higher;

 

or 2) an optimistic balls-to-the-wall scenario where demand for calls surges as what's better than being long stocks... being long stocks levered!

In fact, this regime shift is now extremely notable, the usual negative correlation regime of VIX and Stocks has been abolished in the last two months. The correlation between S&P and VIX is now +0.25 - the highest since 1998...

We have only seen this regime shift a few times in the last decade or two and typically it has signalled an exuberant top (suggesting the driver is more scenario 2 above).

1998 - Stocks dropped 22% a month after correlation peaked

2000 - Stocks tanked 39% in the next 18 months

2007 - Stocks collapsed 57% in the next 18 months

2011 - Stocks tumbled 22% a month after correlation peaked

But it's not perfect, in April 2017 there was no drop at all.

We wonder which regime shift will occur this time?

A glimpse at today's market suggests the levered long S&P Calls are being unwound (VIX down as stocks sink)...

Comments

MonetaryApostate Mon, 12/04/2017 - 15:16 Permalink

The wealthy money printers are going cashless, after hyper printing the sh!t out of their own fake money, they are turning towards digital fake money so they don't have to print anymore, & so they can have utter digital totalitarian control.  Venezuela is NOT a unique instance, it will go global along with cashless societies being forced globally either through hyper inflation or demonetisation.But of course I've been warning about this since 2008, as you saw the beginning of the system collapse & moving of all assets online.Fake everything painted to you by the ultra wealthy money printers.https://plus.google.com/collection/QorNbB

the rule of law Mon, 12/04/2017 - 15:19 Permalink

Life should not be a journey to the grave with the intention of arriving safely in a pretty and well preserved body, but rather to skid in broadside in a cloud of smoke, thoroughly used up, totally worn out, and loudly proclaiming "Wow! What a Ride!
HST

Ricki13th Mon, 12/04/2017 - 15:23 Permalink

If this market can't rally off tax cuts being passed by the Senate then we are getting closer to the top of this bubble than most realize. 

milking institute Clock Crasher Mon, 12/04/2017 - 20:04 Permalink

I,m ready,locked and loaded. if i'm wrong,you can find me at the "Lucky Dice" trailer park in Barstow,Ca. However,contemplating the odds,i think i will soon start to select furnishings for my estate on the Costa Brava. i have one in sight,just not sure about the Russian neighbors,that fucking Yacht is a eyesore,just tacky! anyway,i may finally have time to search for the Metall bars i lost in a boating accident a while back. remember Kids,don't drink while boating!

In reply to by Clock Crasher

Michigander Mon, 12/04/2017 - 20:04 Permalink

1998 - Stocks dropped 22% a month after correlation peaked2000 - Stocks tanked 39% in the next 18 months2007 - Stocks collapsed 57% in the next 18 months2011 - Stocks tumbled 22% a month after correlation peakedBut it's not perfect, in April 2017 there was no drop at all.PICK THE OUTLIER....GEE... 2017 WITH QE1, 2, 3, TARP, OPERATION TWIST, ETC. ETC.