This Is What a Hedged Market Looks Like

This is the kind of content that is consistently put forth over at optionpit.com 

Posted by msebastian on Mon, 10/15/2012 – 4:26pmI have been commenting for sometime why I do not see a sell off on the horizon.  I see a fully hedged market place right now.  But what does a fully hedged market look like?  It looks like this:

Take a look at realized volatility on 10 and 20 day historical volatility.

SPX_0.png

Livevol (R) http://www.livevol.com

HV is currently at 7.9%,  this is in the toilet low.  In fact, when the VIX was near 14,  HV was actually higher than it currently is now.  The VIX is trading between 15 and 16,  Double the value of realized volatility.

VIX1.PNG

Livevol (R) http://www.livevol.com

Why is HV lower than it was when the VIX was 14, than it is when the VIX is near 16?  The reason,  a fully hedged market.  Traders are holding lots of collars and put against generally long positions.  This as we stated last week is going to make sell offs very tough.

But, you say, I think we are going to have some trouble next spring.  I go out and buy long term VIX futures…. Bad idea.

VIX_2.PNG

http://www.vixcentral.com

For how overpriced the VIX cash is, the long term futures are even worse.  I think the VIX is expensive at 100% of HV,  however,  with May trading near 24,  long term vol is about 200% of realized volatility.  Long term futures look like such a bad idea in the near and long term.

The Trade:

If you think the VIX is going up, with Skew steep in SPX I would be looking to won put spreads.  However, we think there is a rally coming with a drop in vol.  This is a great set up for Butterflies and put spreads.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s