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Stocks ended the day higher amid an implied volatility crush, with the VIX index dropping sharply. The VIX closed the gap from its significant rise on Thursday, October 31.
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More interesting was the VIX 1-Day rose by, get this, 110% to close at 30.6!
Today’s S&P 500 term structure shows a significant increase in implied volatility from yesterday, rising from around 13.3 to approximately 27 for tomorrow.
More interesting, however, was how implied volatility varied by strike price, with higher strike prices experiencing a larger increase than lower ones. For example, the IV for the 5,810 strike price for tomorrow’s expiration rose to 25.85 from 22.1, an increase of 3.75 percentage points. Meanwhile, the IV for the 5,750 strike rose to 27.57 from 24.67, a gain of 2.9 percentage points. This suggests a strong demand for higher strike prices today.
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When reviewing options trading for tomorrow’s expiration, we find that within the 98% to 102% moneyness range, 7 out of the top 10 trades were call contracts.
That activity likely explains why the VIX 1-Day rose so sharply while the S&P 500 also moved higher, with the VIX index falling steeply, contributing to much of the move in the broader index.
Meanwhile, the S&P 500 didn’t pull back today as I thought it might last night. I also wasn’t expecting such a rapid decline in the VIX and implied volatility. There’s clearly still a risk of an implied volatility crush tomorrow, and whether the market rallies on that crush will depend on how the options market is positioned overall.
If there weren’t an election with pending results, I’d look at this chart and see a bearish setup, with a breakdown from the diamond pattern and a clean break from the rising wedge. But until the S&P 500 breaks below 5,725, we need to respect the upside potential.
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The 10-year rate rose by nearly 8 basis points throughout most of the day after hotter-than-expected ISM services data but then pulled back following a strong 10-year Treasury auction at 1 PM. We’re still waiting to see if the 10-year can push beyond 4.40%.
-Mike
Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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