Market Rally (in the VIX)

Instead of my usual commentary on the Volatility of an individual equity, I’m going to make a few statements about market Volatility today. 

Below is the LiveVol Software chart of the VIX year to date. (Click any picture to enlarge)  You can clearly see the run up since 4/27/10 has continued today.  Below the VIX chart is the year to date chart of the SPX.  Interestingly, the SPX correction in Jan – Feb was more severe than the recent correction yet VIX is moving more on this correction. Below the VIX candle chart is the Implied Volatility of the VIX, or the volatility of the volatility. It is clearly higher than back in Jan – Feb.



I was thinking of why the VIX was so much more active in this correction vs. the last one.  I came up with a few ideas and I’d love to hear your feedback on this subject…

  1. Leading up to this correction we’ve had a much steeper and longer run up from the recent 2/5/10 bottom.
  2. Longs had given up on buying index puts for protection that lost month after month and are now scrambling to buy them.
  3. I read a rumor on StockTwits that someone had a very large short VIX futures position that is getting a big short squeeze.
  4. According to my inside sources, many retail customers were very short naked puts, ETF, Index and Equity.  This would cause a panic short squeeze to cover the naked puts.  These puts would have been sold in Mar and Apr when VIX was bottoming.  Selling naked puts at the VIX  bottom is a dangerous thing. 

I’d love to hear your comments here.  Please post comments agreeing or disagreeing with 1-4 above and/or add 5, 6, 7…

Personally, I’m dealing with this VIX run up as I’m short (bearish off-center) strangles in SPY and OEX which is hurting. Luckily I bought some cheap OOM puts that are doing quite well offsetting my very short Vega.  Additionally, when VIX was bottoming I bought some RUT back spreads that I’ve adjusted to be delta neutral and very long Vega which is working well.

Mark Sebastian at  often talks about buying these OTM puts called “units”.  He also talks about hidden delta which in this case is short delta these OTM puts acquire as the market drops and Vega increases.  (Mark correct me if I’ve misquoted you.) I highly recommend reading Mark’s blog posts on this subject. 

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