Market up, vol up

When the market goes down, volatility has a tendency to go up (the implied for sure). In other words, volatility and spot are anti-correlated. But it’s not always the case. We are currently in the unusual market situation called “market up, vol up”, where volatilities go up while the market rallies.

SPX-vs-VIX

The usual explanation is to assume that market participants become worried and are assuming a downturn soon. The current market valuations surely defies logic for many professional investors. Although is not cheap, it is not the reason this time.

Instead, there is a buying pressure for calls, notably in the meme stocks, driven by FOMO. A few stocks have rallied significantly on better-than-expected results and investors are afraid of missing the next gap up.

  • It shows in the implied of small lot call trades:

Premium-small-lot-calls

  • And a rally of the 1M implied vs longer maturities, while the tiny calls are in demand:

IWM-1M-10D25D-ratio

 

Reference

Bloomberg, November 8, 2021:  Options Craze Rewriting Rules of VIX, S&P 500 Relationship (below), itself inspired from a Susquehanna research note.

 

Bloomberg-options-craze-is-rewriting-rules-of-vix-s-p-500-relationship

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Written by Gontran de Quillacq

Gontran de Quillacq is an expert witness and a legal consultant. He is a recognized authority in options, trading, derivatives, structured products, portfolio management, hedge funds, mathematical finance, quantitative investment, strategy research and financial markets in general.

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