VIX Is Really Expensive

09/17/2014 8:00 am EST


Mark Sebastian

Founder, Option Pit LLC

Mark Sebastian of shares his theory as to why the VIX hasn’t been absolutely destroyed by the market this week and the only curveball he sees standing in its way: the Scottish independence vote.

Monday, while the S&P was mostly unchanged, the VIX was up more than .80.  When taking into account for weekend effect, a little better than unchanged.  Yet, in many respects, it should have been absolutely destroyed by the market.  Why?  Well, take a look at where movement has been, in and out of meetings, in and out of economic announcements, and wars.  Yet for some reason, this Fed meeting is being treated as if there is some fundamental change occurring. Take a look at the HV/IV spread:

Click to Enlarge

Notice that 10-day and 20-day are about as low as they get, and yet IV30 keeps going up and up. I think much of this premium is unjustified.  About the only real curveball I see in the VIX right now is the Scottish independence vote.  If that goes south, I think there are some serious things to worry about.  Otherwise, I would fade this volatility and intend to do so.

The Trade:

I like executing VIX risk reversals into the event (buying put and selling call) as a way of brining in income, taking advantage of the silly skew that exists in VIX right now and to play IV falling.

By Mark Sebastian, Blogger and Contributor,

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