Daily Options Report

Apparently the consensus about Dubai was that it was much ado about nothing. I heard some fading faders say that "well, if everyone is sure it's nothing, maybe it's something". I suppose there's some merit to that Nero Fiddling sort of argument, but it's also possible the consensus is correct. Not every crisis has to have massive spillover, we just have one that did fresh in our memory banks.

But the market seemed to buy the consensus opinion, at least for the day, as financials were particularly strong.

Given that the weekend did not see an End of Days, I would have expected weakeer volatility in light of Friday's powerful rally. It's important to note that Wednesday's VIX, smack in the middle of a holiday week, probably understated *real* volatility, so it's expected that Monday would see higher levels than last Wednesday regardless of the action in between. But we did have the extreme reaction Friday, and we barely gave any of the back. If you told me where we were Wednesday, then what happened Friday and Monday, I would have guessed that VIX would settle somewhere in the middle, like 22-23. Instead, it's 24.5. And now almost parity to VIX Dec. futures. It's safe to say there's nothing hidden now, these are true volatility assumptions on the board.

Forgive me if you've heard this though, but even though mid 20's does not seem particularly high, it does overprice vs. realized volatiltiy we've seen more or less since July. HV in the SPX fluctuates up and down, but generally averages about 15-16. That translates to a VIX around 20 (the inclusion of all the OTM puts pumps it up a smidge) so until we see consistent volatiltiy in the market, the VIX will likely give up yet again and drift back to the low 20's.