New Options Backtester
Search, filter, and sort 65,776,124 backtests

Market Events

Thursday, February 25th 2021

Is The VIX In A Bubble? Matt Amberson Weighs In On Reuters

VIX versus SPX implied and historical volatility is high because of the kurtosis in skew and may signal a warning for the market.

Summary

Matt Amberson of ORATS and Marko Kolanovic, J.P. Morgan’s global head of macro quantitative and derivatives strategy, were quoted in a Reuters article about the VIX bubble relative to S&P volatility. Kolanovic believes the gap between investor expectations and actual market moves indicates a bubble of fear and demand from investors looking to hedge or profit from a hypothetical market selloff, while Amberson thinks the VIX is elevated due to a more pronounced smile in the implied volatility surface of the S&P500 options, SPX, with the right side of the SPX smile elevated by unprecedented call buying in single names from retail spilling into the index and the left side high because of an increased demand for put protection. The kurtosis is 2.5 standard deviations above its normal levels, driving the elevated VIX in relation to the SPX implied and historical volatility, and the kurtosis typically lasts until a correction in the market.

Matt Amberson of ORATS and Marko Kolanovic, J.P. Morgan’s global head of macro quantitative and derivatives strategy, were quoted in a Reuters article about the VIX bubble relative to S&P volatility although each have different views of the cause. 

Kolanovic is quoted in the article, “The gap between investor expectations and actual market moves is “indicating a bubble of fear and demand from investors looking to hedge or profit from a hypothetical market selloff.”

Matt’s take is that the VIX is elevated because of a more pronounced smile in the implied volatility surface of the S&P500 options, SPX. The right side of the SPX smile is elevated by unprecedented call buying in single names from retail spilling into the index. The left side is high because of an increased demand for put protection. Many think the stock market is in a bubble but with few other investment options, investors buy the market and buy protection.

The VIX is calculated using all options with a bid around 30 days to Friday expiration and can be very far out of the money. Currently, these wings are priced higher than normal and are driving the VIX higher. 

The elevated VIX is a result of the widening smile which is more about greed and FOMO than fear. The smile is systemic and may persist longer than what Kolanovic states. Also, when the smile gets to levels we see today, a correction has happened historically.

The relation of the SPX implied to historical volatility is in line with historical averages. It is the derivative/kurtosis that is 2.5 standard deviations above its normal levels. This is what is driving the elevated VIX in relation to the SPX implied and historical volatility.

The sea change in call buying in single stocks started in July and accelerated in November and has continued to the present. Stocks like GameStop, Tesla and AMC saw call buying at astronomical levels.  Below is a look at the 5 delta call IV divided by the 75 delta call IV in Russell component stocks:

The way out of the money call buying was combined with put buying and broadened the smile in the strike curve. Below is the ORATS derivative or kurtosis measurement in the SPY.

The kurtosis typically lasts until a correction in the market. Thus, we should probably see an elevated VIX relative to SPX volatility until there is a correction in the market. 

For more on how ORATS models the implied volatility surface see this post. https://blog.orats.com/modeling-the-implied-volatility-surface-skewness-and-kurtosis

Disclaimer:

The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.

All opinions are based upon information and systems considered reliable, but we do not warrant the completeness or accuracy, and such information should not be relied upon as such. We are under no obligation to update or correct any information herein. All statements and opinions are subject to change without notice.

Past performance is not indicative of future results. We do not, will not and cannot guarantee any specific outcome or profit. All traders and investors must be aware of the real risk of loss in following any strategy or investment discussed herein.

Owners, employees, directors, shareholders, officers, agents or representatives of ORATS may have interests or positions in securities of any company profiled herein. Specifically, such individuals or entities may buy or sell positions, and may or may not follow the information provided herein. Some or all of the positions may have been acquired prior to the publication of such information, and such positions may increase or decrease at any time. Any opinions expressed and/or information are statements of judgment as of the date of publication only.

Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. In addition, certain trades may result in a loss greater than your entire investment. Always perform your own due diligence and, as appropriate, make informed decisions with the help of a licensed financial professional.

Commissions, fees and other costs associated with investing or trading may vary from broker to broker. All investors and traders are advised to speak with their stock broker or investment adviser about these costs. Be aware that certain trades that may be profitable for some may not be profitable for others, after taking into account these costs. In certain markets, investors and traders may not always be able to buy or sell a position at the price discussed, and consequently not be able to take advantage of certain trades discussed herein.

Be sure to read the OCCs Characteristics and Risks of Standardized Options to learn more about options trading.

ORATS University
ORATS University
Master the art of options
Research
Implementation
Risk
Review
Contact Us
Curious about enterprise pricing? Want to become an affiliate? Questions about our data? Let us know.
Your email
Your message
Submit
ORATSORATS
Institutional Quality Tools for All Options Traders
(312) 986 - 1060
support@orats.com
36 Maplewood Ave, Portsmouth, NH 03801
Trading Tools
APIs
Historical Data
More Information
The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors. For more information please see our disclaimer.
Interactive Brokers is not affiliated with Option Research & Technology Services, LLC and does not endorse or recommend any information or advice provided by Option Research & Technology Services, LLC.