The Revenge of the Calendar

• Posted by Adam Warner
• on May 25th, 2010

If these were normal times, a very weak VIX yesterday makes perfect sense. It’s the first week after expiration, which as I noted in my book, tends to see all sorts of buy-write rolling and weak volatility in general. We also have a long holiday weekend on tap, so you could make a case it’s almost next Tuesday already in options time.

Throw in that the market had a relatively tight range, and voila, you have a perfect backdrop for a VIX decline.

Alas, these are not normal times. The market will discount the bad news at some juncture. And the VIX will drift again back to the low 20′s. If yesterday’s VIX ugliness was accompanied by a big market rally, I would not think twice about it. But it wasn’t, it was just a sluggish range day, a garden variety post expiration Monday.

I don’t believe that’s a great sign for the market. I don’t consider the VIX “smart”. It reacts to facts on the ground. If the first reaction to a hint of calm is essentially worrying about holding options through some holiday decay, that’s not a good thing. The VIX doesn’t “know” we’re all clear yet. No one does.

Now in all fairness, the VIX closed way above June and July futures on Friday, so the market had already priced in some decline in options premiums. So it’s not shocking to see the drift. And of course we’re coming off very high levels to begiin with. Just not great to see it happen so quickly, and the absense of any actual buying in the market.

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