Wednesday, July 27, 2011

On Broken vol, skew and implications on the Markets


As we pointed out earlier this year, volatility is broken. Due to different effects by the QE programs, volatility, and especially VIX, has behaved rather “strange” since the beginning of the QE programs. Many frustrated vol traders have experienced this effect during the last year, and will continue experiencing it until everybody is dragged into believing there is minimal risk in the system. The skew has on the other hand traded somewhat differently, but it is not only an effect of “pro traders” buying protection, but we won’t go into those discussion here.

Instead are presented some charts on the skew (actually the skew in relations to VIX) and SPX index, courtesey of Macro Story. Are we up for some big drop in the Markets, or do we still need the last desperate Alpha chaser to join the bull run? One thing is for sure, not many, even of the experienced vol traders community, understand what is going on in the vol complex, and therefore we expect the unexpected to happen during the autumn.

For further reading on broken volatility and this year’s best vol report, artemis volreport.

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