7/19/22

STOCKS –  NONE

MACRO – SPY, VIX

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Stocks rallied for some mysterious reason on Tuesday. I couldn’t tell you why it rallied; there was no news or new developments. The dollar fell on the word the ECB may raise rates by 50 bps on Wednesday. But the move in the dollar doesn’t seem to equate to the 2.76% rally in the S&P 500.

The expiration of the VIX options is the only thing that stands out to me as a potential catalyst today. We, unfortunately, will not know until tomorrow morning what the outcome will be, but it was a rather strange day.

Implied volatility was all over the map, with the VIX trading lower, and an at the money option of the S&P 500 trading higher. Given the equity market’s strength today, I thought we would see a big move lower in IV across the board, but that wasn’t what happened. IV fell sharply on Friday when the market rallied big. But today, on the August 19, 3930 options, the IV was higher.

On Friday, of course, the market was trading at much lower levels, around 3,860. Even when checking the IV of those 3,860 options for the August 19 expiration, we can see IV fell sharply on Friday, but rose sharply today.

So the move lower in the VIX and implied volatility curve overall had to do with the mechanics of the market moving up, perhaps to keep the VIX pinned around 24.50, while beneath the surface, implied volatility was rising on an individual strike price level. Below you can see the move higher in IV for the 3930 term structure for today vs. Yesterday.

While in this next chart you can see the overall S&P 500 IV is dropping due to the spread between the 3930 strike today and the 3830 strike price from yesterday.  The VIX wasn’t dropping because implied volatility in options were dropping, the VIX was down because the at-the-money options were moving higher, and as they moved higher implied volatility level between strike prices declined.

Of course, notice where all the open interest in the VIX starts to pick up, above 25.

It probably explains why the VIX traded in an incredibly tight range around 24.50 yet failed to move lower despite a ramp-up in stock prices. The rise in the S&P 500 helped to contain the VIX below 25 while rising implied volatility beneath the surface kept the index from moving below 24.50.

You will know very earlier tomorrow if I am right on this. If I am, the VIX should start moving higher, and much, if not all, of the gains in the S&P 500 from today will be gone. If I’m wrong, the rally may continue.

Anyway, that’s all I’m going to have for you today.

Good luck tomorrow

Mike