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Volatility Skew Update.

  • Written by Syndicated Publisher 417 Comments417 Comments Comments
    December 22, 2011

    The divergence between the VIX and Implied Volatility Skew continues to grow to levels greater than what preceded the July selloff in equities. That does not mean a similar selloff is a guarantee but it does mean the market is extremely complacent right now.

    Both at the money (VIX) and out of the money (Skew) options are simply not being bought. In other words positions are not protected from downside risk which can lead to a massive spike in volatility and increased selling.

    As a reminder here is how the divergence between the SPY and EUR looks. There is quite a gap to be filled should equities be on the wrong side here.

    Images: Flickr (licence attribution)

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