The SPX is setting up for a binary volatility event

The volatility market is pricing in a bigger move

I hypothesize that the SPX implied volatility is setting up for a short term steep move OVER THE CURRENT STRADDLE VALUE.  On first glance this might not be such a big thing as anyone can guess that the market might move a lot.  Actually I am move interested in how the Liquidity Provider and market takers price things.  There is usually a signal when VIX says one thing but short term IV says another.  That is what we have going into the close today.

What helps identify what the liquidity provider is thinking

There are several affects going in the SPX pricing today.  First there is the outsize move in SPX based on the weekly straddle.  Last week, I thought the Feb15 SPX volatility looked cheap and it was.  That alone is enough to keep the shorter term volatility bid if the liquidity provider chose to but the graph below says otherwise.  The SPX Mar04 cycle vol is up with VIX down and SPX up a bunch.  That is usually a signal traders expect more, not less, action to follow.


Chart from Cboe Livevol Pro


The Trade War still rules

Most of the current market action hinges on the Shutdown to a small degree and the Trade Talks with China to a large degree.  This is setting up a binary switch for the end of Feb into early Mar.  Note that the price of the straddle in the Mar04 2745 strike is right around $62.  This is eerily close to SPX 2800 and market handicapping at its finest.  You want the line on the Trade War ending with a straddle?  That will cost you 2800 SPX thank you very much.

Take a Gold class and learn to handicap market conditions

There are ways to trick the handicapping since that date is starting to resemble an earnings cycle in the minds of market players.  You can learn that in our Chat Room or Gold and Plat classes.  If I am right the straddle should stay consistently bid as the possibility of Trade Deal escalates.

Disclosure: VIX, VXXB, SPY, SPX positions

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