As Bill Luby reported on his blog VIXandMore. ?VIX option volume and call volume both set records today.? Which leads us to this question? ?Why? ?There are two potential answers:
1. ?The Market is about to tank and smart money is covering their butt
2. ?The large stock funds are scared, and hedging their portfolio’s
Lets pull up a 1 year chart of VIX. ?On the top are the levels of VIX and on the bottom is call and put volume. ?I thought it would be interesting to look at past volume spikes to see if they are a potential leading indicator.
LivevolX (r) www.livevol.com
When I look my gut says no. ?More often not, the VIX does fall after a big volume spike, but in a few cases, the VIX does move higher quickly. ?My guess is all other things being equal, its about the same. ?You are more likely to win going short VIX on these spikes, but when you are wrong you will lose more. ?That said, this was an especially large set of volume numbers.
If we flip the VIX over and look at SPX, do we see anything on put volume spikes?
LivevolX (r) www.livevol.com
The answer is a resounding yes over the last year (and really almost all the time). ?The loan exception was in 2011. ?In that case the market was more choppy, but did in fact find a floor. ?We are NOT seeing that kind of volume in SPX that might point toward a bottom. ?However, VIX has NEVER had this kind of call volume before. ?It coudl be calls are being used a replacement for put buying in SPX. ?If that is the case this is bullish the market (another likely scenario is that there might have been a large variance swap traded upstairs and the BD was hedging it).
Finally, the VIX spent 1 Day in its weird form, and despite little change in Italy, the driver of yesterday’s vol run, there was no follow through.
vixcentral.com
The Trade:
I would like to see some follow through tomorrow in SPX and VIX, at that point I will start dipping my toe in the water on some short VIX plays. ?I sitll fear Italy could be in our headlines for a while. ?The Truth is we won’t know for a few days what is going on. ?VIX totally overracted yesteray, then corrected itself today, thats really it. ?The next move is the one to watch.
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