Andrew Giovinazzi of OptionPit.com looks at how IV ATM came in a bunch following the FOMC announcement and the one more thing left on the horizon that may cause another ripple.
So the Fed is leaning toward 2015 to start raising rates? There is not much different in that Announcement, as the Fed watchers look to parse all of the twists and turns in Wednesday’s FOMC meeting minutes. I think that after this long in our plodding recovery, market players would be happy to see the Fed exiting. That means things should be getting better, but that is just me.
Slightly strange then Wednesday, as the usual drop in VIX had more juice come out of the ATM options. Granted the news was more status quo so the ATM IV should drop but I thought it would take more of the OTM IV as well. The drop in the curve would be more uniform. That is not the case as you can see from the Inverse Volatility Landscape. IV ATM came in a bunch (tall red buildings are the most) but the skew heavy downside did not come in much at all.
There is one more issue on the horizon.
3D Charts by OptionVision
Click to Enlarge
I think the skew is staying bid because of the Scottish referendum. The EuroZone (or near it) does not need another bird leaving the nest and the dose of instability it will cause is enough to unnerve traders. 2011 is still fresh in everyone’s mind.
At this stage, I will go with the exit polls and say Scotland stays in. William Wallace might be rolling over in his grave but he did not have free healthcare and Cool Britannia. The trades that make sense are Iron Condors in the big indexes.
The Trade
IWM or SPX is probably best as the last of the skew should die by Friday. Stay away from the ATM in case William Wallace gets his revenge. Controlled short vol is the key.
Disclosure: positions in VXX.
By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com
