7 de agosto de 2010


It appears that volatility traders are positioning for a major move in the S&P 500 (NYSE: SPY) over the next six weeks. This is represented in the major and continued increased in the CBOE Volatility Index futures contango.

Ok—that’s a mouth-full; let’s break it down. The CBOE Volatility Index (CBOE: VIX), which tracks the daily average movement of the S&P 500, is currently at 22.22, whereas the front month (August) future is trading at $24.00 and the September future is trading at $27.45. The curve of those prices from the near term into September is up-sloping, and notably so; the up-sloping nature of the futures curve is known as contango.

Given such a sharp level of contango in the futures over the next six weeks ($5.23) versus the actual historical volatility of the S&P 500 of 18% (total contango of $9.45), one can assume that traders are “bracing” for something, something large.

Several VIX pit trades are also confirming the growing sentiment of a large move in the equity markets. Yesterday, the September $45 call was purchased 50,000 times for $0.50 and earlier today the September $40 call was purchased 5,000 times for $0.80. So, not only are these trades confirming already elevated VIX futures, but they are also betting that those levels could increase over the next six weeks.

That would be the equivalent of the S&P 500 trading slightly less than 1% per day to over 3% per day—a significant event.

While the VIX is commonly referred to as an inverse to the S&P 500, this does not mean that the market is poised to crash lower; this could mean that a strong rally ensues as well. (Though, to be perfectly clear, the above options trades are in fact betting on SPX downside.) There is also the possibility that traders are “dressed up with no place to go” and that their theses and worries will prove unfounded with the futures retracing lower, toward the spot price.

Be that as it may, large, institutional traders are bracing for something significant to happen in the equity markets.

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