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Here's a summarized version of my thoughts on the volatility market this week:
Recent Spike in Spot-Vol Beta: On Friday, we observed one of the largest spikes in spot-vol beta ever recorded. We've extensively researched this changing dynamic over the past two years (details are in our paper on our site) and are pleased to see it materialize. Therefore, it's not surprising that volatility performed well. We have yet to see how extreme this relationship can become on the upside.
Equity Volatility and Dislocations: Typically, when equity volatility spikes, larger dislocations occur in single stock surfaces. However, the surfaces of larger names were not significantly disrupted. There were no indications of forced buyers or sellers causing irrational kinks. The only notable dislocation was how extended spot VIX was relative to the futures curve at certain moments during the day.
VIX Collapse: VIX was sharply reduced by the close, dropping 7 vol points after noon, while futures maintained a steady bid. From an end-user perspective, this makes sense. Many entities use SPX options for "yield generation/income." We observed shorter-term corporate hedgers monetizing their previous buys and minor short vol flow selling SPX vol, impacting VIX pricing. Meanwhile, VIX futures are primarily used by dealers to hedge VIX derivatives and by larger agents (pensions/foundations) to gain raw exposure to volatility as a hedge. Volatility might collapse, and this could amount to nothing, but with a convexity-focused book, this price action is exciting because it sets up larger, more violent squeezes in volatility if the S&P continues to fall. It's a dynamic similar to heavily shorted stocks. Ex: Heavily shorted stock goes up a lot at once, people short more of it, it goes up even further, and you get the first wave of forced covering.
VIX Vol - SPX Vol Basis: The basis is extended. Some colleagues at sizable RV shops are eyeing this, which is unsurprising. However, be cautious in assuming the basis will align with historical trends. The changing spot-vol beta dynamic significantly affects its performance. If the basis deviates from historical data, don't fight it. Market Catalysts: It's unclear what the market is trading on—BOJ/yen issues, recession talks, disappointing earnings, Middle East conflicts, yield curve concerns, etc. While price movements can be unpredictable, confusion about the direct catalyst often signals further short-term vol.
Here's a summarized version of my thoughts on the volatility market this week:
Recent Spike in Spot-Vol Beta: On Friday, we observed one of the largest spikes in spot-vol beta ever recorded. We've extensively researched this changing dynamic over the past two years (details are in our paper on our site) and are pleased to see it materialize. Therefore, it's not surprising that volatility performed well. We have yet to see how extreme this relationship can become on the upside.
Equity Volatility and Dislocations: Typically, when equity volatility spikes, larger dislocations occur in single stock surfaces. However, the surfaces of larger names were not significantly disrupted. There were no indications of forced buyers or sellers causing irrational kinks. The only notable dislocation was how extended spot VIX was relative to the futures curve at certain moments during the day.
VIX Collapse: VIX was sharply reduced by the close, dropping 7 vol points after noon, while futures maintained a steady bid. From an end-user perspective, this makes sense. Many entities use SPX options for "yield generation/income." We observed shorter-term corporate hedgers monetizing their previous buys and minor short vol flow selling SPX vol, impacting VIX pricing. Meanwhile, VIX futures are primarily used by dealers to hedge VIX derivatives and by larger agents (pensions/foundations) to gain raw exposure to volatility as a hedge. Volatility might collapse, and this could amount to nothing, but with a convexity-focused book, this price action is exciting because it sets up larger, more violent squeezes in volatility if the S&P continues to fall. It's a dynamic similar to heavily shorted stocks. Ex: Heavily shorted stock goes up a lot at once, people short more of it, it goes up even further, and you get the first wave of forced covering.
VIX Vol - SPX Vol Basis: The basis is extended. Some colleagues at sizable RV shops are eyeing this, which is unsurprising. However, be cautious in assuming the basis will align with historical trends. The changing spot-vol beta dynamic significantly affects its performance. If the basis deviates from historical data, don't fight it. Market Catalysts: It's unclear what the market is trading on—BOJ/yen issues, recession talks, disappointing earnings, Middle East conflicts, yield curve concerns, etc. While price movements can be unpredictable, confusion about the direct catalyst often signals further short-term vol.
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