Goldman Sachs Says Wild VIX Move Sets Up For Option-Selling Opportunities
Goldman Sachs analyst, John Marshall, stated he will be watching the credit markets closely on Tuesday for signs of whether the spike in VIX volatility has cleared the decks for short-term volatility spikes or if further buying of volatility will occur.
Yesterday, the VIX reached a level above 37 which rivals the highest level since 2015, and implies that the SPX should move an average of almost 2% daily. He notes Friday was the SPX’s first 2% one-day move since 2016. He believes that higher SPX realized vol (2018-to-date: 18%) is not nearly high enough to justify this level of VIX.
Marshall believes technical buying likely furthered dramatic end-of-day movements in VIX futures. The VIX increase of 20 points was the largest absolute or percentage change ever and the analyst believes that covering inverse ETPs’ short future positions and adding to levered products’ long positions drove VIX ETPs issuers to buy ~$230mm vega in VIX futures which is greater than 100% of a normal day’s volume and amounts to roughly 50% of the open interest of the first two VIX futures.
The analyst notes that the credit markets first began to show concern in mid-January when they dislocated from equities and stated "the sudden shift in option market conditions shows how difficult “just-in-time” edging has become as the VIX rose from the 10’s to the 30’s in two hours, and should set up option-selling opportunities once conditions begin to normalize".