At regular intervals this year, sophisticated market participants have gone to extraordinary lengths to explain to everyone else why the VIX isn’t higher given pervasive macro and policy uncertainty.
Although not always obvious from my dismissively imperious cadence, there’s a lot I don’t know about the world, and I think everyone should conceptualize of life as a hands-on continuing education program. Any day you don’t learn something new is a bad day, in my opinion.
Given that, I’ve eagerly engaged with each and every attempt to offer a fresh take on the “too-low” VIX, but each time, I’m disappointed. Not because smarter folks than myself haven’t ventured elaborate, math-based explanations that sound impressive and speak loudly to their CVs, but rather because the situation simply isn’t complicated.
Someone who seems to generally agree with my assessment is Nomura’s Charlie McElligott who, on Tuesday, again offered the common sense explanation to what he aptly described as the “weekly” “Why is the VIX so low?” question.
While I wouldn’t want to discourage readers from weighing the merits of every attempt to present a new spin on this putative mystery, I would encourage you to consider Charlie’s take as the definitive assessment, because i) he’s right and ii) the most straightforward explanation for ostensible quandaries is very often the best. Occam’s razor and such. The excerpts (below) are from McElligott’s Tuesday note.
It’s pretty simple in my mind: The ‘low VIX’ question is about the difference between the Quantitative Easing era of the post-GFC period through 2020 and the current Quantitative Tightening reality that we remain embedded in until the Fed is forced to actually pivot to outright easing.
In the QE era, the Fed told you to be leveraged-long risky assets and bonds, so you actually needed to hedge those assets. Thus, ‘Skew’ — a relative measure of demand for downside / puts versus upside / calls — was very steep, because you wanted downside puts to hedge your leveraged-long positions in financial assets.
But in this current QT reality, the Fed has been telling you they’re gonna tighten financial conditions until a recession, or until something tends to ‘break’ –i.e. “Don’t be long assets” as they reprice risk premia.
So, in said QT regime, if you’re not long assets and instead, sitting on historically low net exposure and / or a historically extreme ‘high cash’ position, you don’t need ‘crash protection’ — cash itself is an at-the-money put!
I would never say Charlie is wrong, but how does the lack of crash protection explain the increase in options volumes? Seems like it’s about not needing duration in crash protection. How much of 0DTE gets priced into the 30-day forward projection of volatility?
This quote, taken from Fridays article “Mechanics of the Post-FOMC bear” might offer some explanation with regards to the options volumes:
/quote
“Single-names saw considerable over- / underwriting flows into the brief vol squeeze,” he added, noting that skew flattened “yet again,” with calls in demand into the rout relative to puts “for the same reason we’ve seen all year: Clients are sitting high cash and/or low net exposure,” which means they’re more concerned about missing a crash up (i.e., a rally) than they are buying protection against downside in stock exposure they don’t have.
/unquote
Is there a financial acronym glossary anyone would like to recommend?
Yes. I use the Investopedia Financial Dictionary. Has many key acronyms and concepts. I also find that just Googling some of them will get me the answer. Always do Investopedia first.
Agree with Mr. Lucky. I use them all the time, as my aging brain can’t remember them from one time to the next. Unfortunately, H doesn’t follow the old journalistic convention of defining his acronyms the first time he uses them in a piece (though I’m not sure many do any more.)
I have found Herold’s Financial Terms Dictionary to be quite useful for day-to-day use
[ financial-dictionary.info ]
It does not cover the McElligott-specific slang, though, I gues that can only be learned by reading the corresponding articles on this site 😉
No idea if the following is a valid conclusion as it is simply based on what my eyes have observed for a while, but I can’t help but think that the current sell-off may ultimately run deeper because the vix is remaining stubbornly low.
H-Man, I think he hit the proverbial nail on the head — if your not long equities, who needs protection, especially in a choppy, sideways market. But if the market starts a prolonged and meaningful slide, (S&P less than 3600) I suspect we will see VIX make a substantial move to the upside.
“ you don’t need ‘crash protection’ — cash itself is an at-the-money put!”
Exactly what H has said already multiple times. Are we being tested here?!