Despite a somewhat successful buy-the-dip rebound yesterday, VIX remains stubbornly elevated at 22.88 pre-market on September 22nd, 2021. The volatility index actually closed higher at the end of US trading yesterday, however all major indices rallied at 9:30pm ET when Asia markets opened their Wednesday morning. Much of Asia had a 4-day long mid-autumn festival weekend, leaving investors wondering how much global impact the Evergrande credit downgrades and crypto-meme contagion would bring. The answer: the jury is still out.
Options Traders Holding Vega and Gamma Risk
Option traders haven’t seen much in the way of implied volatility all summer long. Other than a few single-day spikes, VIX remained nicely contained between 15 and 20, with any market dip instantly recovering into new all-time highs. Starting last Friday, we are finally seeing a slightly prolonged episode of higher option premiums, with Monday topping out at nearly 29.00 (many consider 30 to a fearful tipping point, and a good buy signal).
Even though Nasdaq and S&P are still far below their week-over-week levels, there was a relative calm most of yesterday. Nasdaq for example saw two-sided action all day long, bound to a fairly tight range of +/- 0.5%. However, option traders hoping for a VIX collapse did not receive much of a payday.
Tony Batista and Victor Jones from TastyTrade discussed the phenomenon on “The Last Call” yesterday. Where is the supposed payoff from holding on to a basket of short strangles and iron condors? Apparently, there is still lingering uncertainty from the Fed statement due today. “While Jerome Powell is still talking, we won’t see (option) premiums come down.”
Victor pointed to the vol curve as evidence that the market is pricing in a near-term binary event. The front-month options for E-mini S&P futures options and Nasdaq futures options are high. The Nov / Dec / Jan options, not so much. While there is always some amount of front-loaded gamma-risk during a panic, the levels this week are far more pronounced.
Fed Statement Timing, Rate Reaction?
Is that why the plunge-protection team come back as usual? We will see this afternoon, when the fed statements come out and the usual post-Powell sleuths pick apart his words one by one (CNBC talking heads actually notice when single words disappear or appear from prior meetings). Just remember, the mood immediately after anything Fed-related tends to be erratic, and even seasoned traders know not to trust the initial market reactions.
The statement is due at 2pm ET today. Investors expect some clues given on the timing for future fed funds rates, and more importantly, any tapering or reduction in their purchase of long-term treasury bonds. It has the potential to affect mortgage rates, housing affordability, and ultimately the sustainability for an incredibly accommodating real estate investing environment.
The affordability index continues to show most incomes have not kept pace with housing prices. However, buyers are still fighting through bidding wars to purchase new homes, hoping to lock in amazing 30-year fixed rate mortgages before rates rise. Although many predict rising rates will apply downward pressure on home prices, some remain optimistic. Rising incomes are sure to follow along with moderate inflation, and buyers purchasing primary residences with no plans to move should be able to weather any short-term downturns. As usual, overly leverages speculators would be most at risk.