Morning Report Tuesday 12 May 2015
Last night just after midday in Chicago, around $US100m worth of VIX options were purchased in about 1 second. That is the equivalent to 50% of the average daily turnover. The unusually large purchase was a hedge, or a bet that volatility will rise in coming months in US equities. Volatility usually rises when equities fall e.g. last night the VIX rallied 7.7% as the Dow fell 86 points.
• In simple terms somebody has made a substantial play that equities will fall (or purchased protection against it) in coming months.
As most of you know I am targeting a 10-15% correction from US equities in 2015, hence my initial thought is “a tick up in the volatility index is often preceded by a pullback in US equities” – see chart 3. When we investigated the correlation between the VIX and the S&P500, my perception is they move together and neither leads – see chart 2 – this makes sense on reflection as they are probably “arbitraged” back into line.
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