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Volatility Monitor

"December SPX Expiration & March SPX Skew"

posted by CAPIS on 12/09/2015 at 8:29 am

by CAPIS

12/09/2015 at 8:29 am

SPX futures are lower by 4 points to 2054.75. The biggest news due out is obviously the FOMC meeting next Wednesday. Domestic equities are heading for the third straight down day this morning. Both crude and gold are modestly higher this morning. The VIX futures are higher across the board in a modest flattening of the term structure on the negative equity tone this morning.

The FOMC rate decision comes next Wednesday which should make for a far more interesting December than most. The VIX December future will expire on the open before the FOMC decision making the January VIX future (18.35) the nearest tradeable expiry. SPX December options, however, expire only two days after the meeting on December 18. Given the fact that generally the closest to expiration options (usually weeklys) see the most volume, these standard Dec options should get a lot of attention. In fact, JPM strategist Marko Kolanovic noted that the “Fed’s December meeting falls a peculiar time, less than 48 hours before the largest option expiry in many years. $1.1t of S&P 500 options (of which $670b are puts in the 1900 – 2050 range) look like a massive stop loss order under the market.”

A little further out in the 3-month expiry, SPX options are showing a high degree of skew with respect to the last ten years. Skew as defined by the 90%/110% of SPX spot implied volatility differential is in the top 3% of readings over the past decade (graph below). In a Bloomberg article this morning, Deutsche Bank AG attributes this to the banks. The stress test evaluations by federal regulators have led to banks to hedge against the “severely adverse” scenario. This has led banks to being, in the very least, flat in positions where they may have been natural sellers of insurance (downside puts)… or now more probably long these puts. This obviously leads to higher implied volatility levels of downside strikes relative to at-the-money strikes (skew).
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