Earlier this week, we brought you “‘Vol Up, Spot Up’: This Hasn’t Happened In 20 Years“.
In that post, we highlighted the latest from Goldman’s Rocky Fishman who observed that recently, we witnessed the first case of the S&P returning at least 4% in ten trading days with the VIX simultaneously rising in two decades. In the same piece, Fishman also shows you the frequency of “vol up, spot up” moments:
As you can see, that’s the highest occurrence rate since the eve of the dot-com bust. “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 went on to write, 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.
Well, Chintawongvanich’s latest is out and in it, he reminds you that “‘stocks up, vol up’ is the talk of the town.” What accounts for the simultaneous rise that’s found the S&P up more than 6% in the first four weeks of the year with the VIX rising ~2 points? Two things, he says.
First, realized vol. is rising and indeed, Chintawongvanich exclaims that because “realized volatility over the past 1 month is actually higher than what was implied 1 month ago, owning options has been working for the first time in a long while – and being short them is hurting!”
Imagine that. The implication there is that call writers are covering as the rally steams ahead.
The second reason for “stocks up, vol. up” is the same reason Chintawongvanich cited last week. Namely that no one was respecting the right tail, and after some lucky SOBs hit it big by paying next to nothing for OTM calls only to see them skyrocket, the tails have repriced higher. Or, more simply, vol. was just too low.
So will this continue? The short answer is “no.” Eventually, Chintawongvanich writes, the “options market reprices options higher and at some point overcorrects.” But probably the most important thing to note for anyone who is inclined to maybe draw spurious conclusions from recent events is this:
“Stocks up vol up” does not mean “stocks down vol down” if the selloff is large. In other words, if you rally 1% but then sell off 50bps intraday, you may very well see that vol goes down. But if we sold off 5% obviously the VIX isn’t going lower!