Enis’s Macro Wrap – Options Market Gets Jittery

by Enis December 5, 2012 7:19 am • Commentary

Big players are finally starting to buy protection.  While the SPX index is basically unchanged in the past 7 trading days post-Thanksgiving, trends in the options market have shown a notable shift.  The most basic, noticeable shift has been the move in the VIX, up 2 points from 15 to 17 in that time span, even as SPX realized volatility has drifted lower, and the index is unchanged.  VIX futures are also higher, especially catching a bid in the past 3 days.

This caught my attention because the most recent market selloff in November showed no signs of panic in the options market.  Here is the chart of the VIX index (in red) in the last year, overlaid against the SPX index (orange):



I’ve circled the VIX price action during the 100 point selloff in the SPX in Oct/Nov.  Incredible that the SPX sold off more than 100 points, and VIX couldn’t get above 20.  Compare that to the SPX selloff in the spring when the VIX got well above 25.

Today, however, we are starting to see the VIX tick up even without the market selling off yet.  Moreover, look at what has happened to the CBOE put/call ratio in the past week, after I highlighted its low print of the year in last week’s CotD post:



The green arrow shows the rapid move, as puts have become more active than calls after last week’s call euphoria.  That’s a quick sentiment shift in a short amount of time.

Though the market itself feels quite complacent about the endless fiscal cliff headlines, options traders are starting to position for bigger moves in the next few weeks.  The options market was right about not panicking in mid-November.  Will it be right today about starting to get concerned while stock investors show no signs of jitteriness?  I think so.


Markets overnight:

  • China was very strong, with Shanghai up 3% and Hang Seng up 2%.  Much speculation about what caused the move (with the most legitimate being that China eased restrictions on investing in banks), but the Shanghai looks like an oversold bounce that caught buyers when it broke back about 2,000.  The rest of Asia was generally slightly higher.
  • Europe opened up close to 1%, but is now close to flat.  Eurozone retail sales were down 3.6% vs. an expected 0.8% fall, which trimmed gains.  SPX futures up 0.2%.
  • Dollar and Treasury bonds higher, and commodities mostly higher, the second day where that correlation has not been positive.
  • ADP Employment data out at 8:15 am EST, and ISM Non-Manufacturing out at 10am