‘Vol Up, Spot Up’: This Hasn’t Happened In 20 Years…

Over the past three weeks, U.S. (and global) stocks have celebrated the dawning of the new year by extending the “bigly” gains logged in 2017.

The pace of the rally has been furious with RSIs from New York to Hong Kong screaming “overbought” as investors pour money into equities like there’s no tomorrow on the (probably correct) assumption that on the off chance there is a tomorrow, some other E*Trader will be more than happy to pay more.

Amid the “melt-up”, some folks have noted that the VIX has been rising with stocks and on Wednesday, Goldman’s Rocky Fishman is out flagging a “first time in twenty years moment”. To wit:

This has been the first time in 20 years that the SPX has returned at least 4% in ten trading days and yet seen the VIX rise at all.

Here’s a chart from Fishman that shows the frequency of “vol up, spot up” moments rising to its highest levels since the eve of the dot-com bust:

VolUpSpotUp

“The increase in volatility amidst a market rally may in part reflect increasing risks, and may also reflect a bullish willingness to spend premium to add to upside exposure,” Fishman goes on to note, recalling what Pravit Chintawongvanich of Macro Risk Advisors discussed earlier this month on the way to positing that the VIX might have found a floor.

Fishman also notes that calls have risen sharply relative to puts (more on that in the Chintawongvanich post linked above) and so, one natural thing to do if you’re concerned that perhaps everyone has lost their fucking minds gotten ahead of themselves, is use calls as funding legs for other options. Here’s Rocky:

The strong spot rally has been the most important driver of call option prices of a given strike, but higher implied volatility and lower skew have also boosted S&P 500 call option prices. With the SPX already approaching our 2018 year-end target, we identify trading themes that involve selling SPX calls to buy hedges or upside in other markets.

Calls

That, or you could just buy expensive calls and pile them atop your existing longs because as Ray Dalio calmly explained on Tuesday, this sucker’s about to “blow” and you’re gonna feel pretty “stupid” if you’re not in on the party.

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