The VIX is lying dead on the floor. Skew just shot up to one of the highest readings it has posted.
Somebody is buying protection that nobody else thinks they need.
Those back month options far out of the money are juicy right now. I traded into a Christmas tree spread today because the skew got that rich.
Three weeks ago skew was horrendously low. It reversed hard as of yesterday.
We don’t know yet what that hedging means. We will know a lot more by Tuesday and Wednesday of next week.
Now look at the tape underneath it. The S&P 500 has gone nowhere since early May, chopping between 7,350 and 7,700 for four and a half months.
Every session turns into a game of Whac-A-Mole. Semiconductors pop and healthcare fades. Healthcare screams higher and the semis roll right back over.
That rotation keeps the index pinned near all-time highs. It also buries how much risk is stacking up.
The bond market is where the calm breaks. The ten year hit 4.8% and the notes are scraping the lowest levels I can remember.
The S&P 500 has decided it doesn’t care. Markets don’t care until they do.
Here’s what I broke down in today’s session:
- Skew ran from horrendously low three weeks ago to one of the highest readings on the board. Back month out of the money options got rich enough for me to trade into a Christmas tree spread today.
- The September 16th Fed meeting carries a 58% chance of a quarter point hike off the 3.50 to 3.75 target. October 28th sits at 70%, with a 15% chance of a full 50 basis points before the election.
- The ten year touched 4.8% and I think we crack 5% and run to 5.2%. When everyone else is foaming at the mouth, I’ll be selling bond puts.
- Next week prices roughly a $90 expected move across a four day week. Tuesday, September 8th prices at the money volatility near the floor, and I am taking the over.
- I’m short healthcare with out of the money put spreads 105 days out. I can’t time the break in that rotation, so I bought duration instead.
Nonfarm payrolls came in around 162,000 against estimates near 56,000. The market took the miss in stride and the bonds recovered, which tells you complacency is still running the show.
CPI lands late next week. That’s the last firm number the Fed sees before it decides.
September is historically the most volatile month in the market. We’re walking into it with vols priced for nothing and the traders coming back from the Hamptons.
Put your helmet on.
