Last 30 days indices's (SPX , Q's and DOW) IV were out of whack in respect to their components vols. I tracked the weighted basket IV vs Index , and for DOW the ratio was from 1.4 lowest up to 2.1 (!) on the high side. As Riskarb confirmed in one of the posts , the wild swing was due to huge skew in OTM puts heavily weighting on the mean when market went down.
sorry IV I'm really dense but are you saying the components IV are actually lower than the index? Thx
no , of course they are higher (by certain ratio). My point was that this ratio changed a lot during last 30d. IOW , when market was falling , the Index's IV raised much higher (because of the skew) on % bases than components IV. Vise versa when market raised.
Do you think you might be able to find an arb opportunity? Its too far beyond my abilities but I know you are interested in dispersion.
for me as a retailer , it was just an very good indicator of what dispersion to enter (+ or -) , but I bet the pros traded it as an arbs (or risk arbs) and already closed the position when index vols collapsed. SPX vols went down from 20 to 12 in couple of days , unreal.
Still holding Aug VIX 20.00 Calls looking for vols to pick back up over the summer (as opposed to what people usually expect during the summer). I do not think Bernanke is done spooking the market..