Price and IV divergence

Discussion in 'Options' started by sugar, Jan 16, 2008.

  1. sugar


    S&P500 Index has dropped -2.5% and IV... HAS DROPPED TOO.

    What do you think about it? Is that a bullish indicator?

    Thanks in advance.
  2. In order to have that happen, there would have to be daily range compression and/or a lot of premium selling to keep the VIX down.
  3. sugar



    but today s&p dropped again but this time IV raised. Normality returns.

  4. ?..............mean-reversion........or maybe somebody could be doing a big volatility arbitrage between the S&P, S&P options and the VIX contracts.
  5. When markets drop in price suddenly IV spikes up more noticeably like it did in early NOV when the market dropped hard in 4 days really fast. In that time period VIX spiked from 23 or so to 31. Volatility also reflects uncertainty and with that drop the panic sets in and vols are juiced since we do not know when it will stop or how far we are going to go lower.

    Now, over the past two months we have gotten a lot of information from economic indicators, from the Fed and from analysts and there is a generally accepted feeling about where the economy is going in 2008 and what actions the Fed is likely to take. Although INTRA-day vols are high as news sends buyers and sellers back and forth in wide swings, overall the uncertainy is not as great as it was in Nov or even in AUG. And the Fed has now acted a few times with more guidance than before.

    So although VIX is higher than mid DEC when the market bounced off of those early NOV lows, it is not the same panic and capitulation in the short-term as many investors are more aware of what is most likely coming.

    So the market is dropping but VIX is not spiking to 30 just yet because there is a little less uncertainty in the air and although the bad news is coming regularly, it seems more the norm than th exception.

    This is just my fundamental view of why VIX may not be running as high on these sell-offs. There may be other technical trading reasons affecting VIX and VIX futures why it has held up better.
  6. sugar


    I agree in the main, but I’d add two things.

    Yesterday, with a S&P decrease of 2.5%, certainly it was significant, IV dropped too. I think it was a break in the IV teory that consider it like a sort of indicator of the market feeling.

    Today we saw market dropping lightly and IV raising. The panic sets yesterday, but IV raised today, when the panic didn’t exist.

    On the other hand, remember that VIX and IV are two different things. Skew makes VIX misleading when IV changes lightly and the maket moves quickly, just like now.

  7. sugar


    Arbitrage would not change IV price, it would balance options price between different markets with same underlaying, doing IV motion consistent between these markets.

    Really I don't know what happened but I'm sure that it was result of a market makers estimation of future volatility.

    Maybe is a case of asymmetric information. We'll see it pretty soon.
  8. Any specific culprits to be named ? :D
  9. Culprits?.......Renaissance, Citadel, Tudor, Cohen et al. The "arbitrage" behavior is that there can be premium-buying against the underlying one day, then a reversal the next in order to produce the volatility movement that seems to defy normal "logic". Maybe somebody has unearthed a quirk in the VIX that'll soon be revealed. I'm just looking for simpler explanations instead of writing billions of equations on a chalkboard.
  10. Hunt for alpha defies normal "logic"...there´s nothing worse then "must perform" market players...
    #10     Jan 17, 2008