"BIG UPS"...Some very interesting changes beneath the surface of the realized and implied vol in the SPX. First, note that SPX 1m realized is below 14 for the first time since Dec'21. What's interesting about the decline in realized vol is the extent to which it has resulted from the decline in "up vol". Incredibly, in 2022, with overall realized SPX vol at 24.2, the realized vol on up days was 25% (vs. 23.5% on down days). There were 23 daily moves of +2% or more in 2022. This behavior made its way into the SPX vol surface, dramatically

Now versus 3 weeks ago....What's SIVB debacle been worth in market prices?...Well, first, "financial conditions", at least by the GS measure are actually a tad easier now than on 3/8... Remember that 40% of this measure is driven by changes in the long-end of the US yield curve. USD and short rates also figure in (smaller weights) and are easier now vs 3 weeks ago. here's a summary of other measures versus Wed 3/8
1. VIX futures curve up roughly 1.5 for most expiries
2. 10y yield down 45bps
3. 2y yield down 102bps
4. 2/10 curve dis-inverted by 58bps

Market risk has different character over the last 2 weeks...it's more "financial" than it was last year...ie, now, it's the classic risk-off where bonds rally and tails get bid. Here's a way to see it. This am, with S&P futures down less than 1%, the VIX is up about 2.5. In 2022, by contrast, there were 10 daily SPX moves that were down between 2 and 2.5% and on those days, the average VIX increase was just 1.7. The price of the tails is about the market's widening of the distribution of what is possible.

Lots of discussion last year on the emerging conflict in the Fed’s growth/inflation “dual mandate”. But, of course, financial stability has always been its third, unwritten and most prominent objective. Markets must clear, prices cannot become toxic and fear cannot become an overriding psychology. Here, the Fed is engaged in “crowd control”. As it abandoned one form (low rates and forward guidance), it was forced to pursue another - guaranteeing all deposits. The view here is that it had no choice whatsoever. Tim Geithner

How $VIX Gets to 40: Step 1 - Carry
Outside of the GFC and Pandemic (when the market simply broke), the exhaustion point for the VIX is
traditionally between 40-45. This is when enough damage is done (the cure for lower prices is lower prices) as well as the authorities crying "no mas" is sufficient to allow for stabilization. We got to 45 in 1998 with LTCM and again in 2002 with Tyco, Adelphia and WCOM. There were other sharp, fleeting risk-offs like the Aug’15 China FX re-peg and the early 2018 XIV unwind that brought the VIX to around 40.

an interesting question in markets is always "is the cost of insurance a good deal or not?"...always a few ways to approach this and there's rarely a slam-dunk yes or no answer. we can look at the price of insurance in 3 contexts...1. versus its own history 2. how it carries and 3. what future events it may protect against...how likely those events are to occur and how significant is the market reaction to them if they do occur. in SPX, #1 suggests we are on the higher side (2m ATM vol in 75th %ile last 10 years) on level of vol

David Einhorn famously called out Lehman's accounting in May of 2008 at the @SohnConf. By 2015, I was attending, sponsoring and bringing clients to the event. I thought, what a win on all fronts. I get to listen to the best and the brightest, hearing from the likes of Ackman and Larry Robbins, while contributing to important charitable causes, all while spending time with clients. I asked myself "what would it be like to create the Ira Sohn for macro?". And a few years later MacroMinds was born. We've raised almost $1mln through our first two events

@KrisAbdelmessih had a great recent substack talking about how the “whole life” insurance industry sells product benefits without any reference to price (because the price typically sucks). In high finance, the equivalent is the “hedging and monetization” business. Here, the Street will cook up a derivative structure to secure the value of your concentrated equity position, lend you money against this newly stable position (stock plus put minus call) and, potentially, help you achieve a superior tax outcome along the way.

the stories and narratives around the impact of #odte are pretty contorted. one of them is that the volume of these began increasing in June'22 and because there are net sellers (really?) it goes to explain a decline in vol since then. here's an alternative explanation --> simply put, equity vol follows realized vol (carry matters most) and realized vol has been driven by the market's ability to see where the Fed is going. that path became clearer as the hiking cycle matured and inflation cooperated...the $MOVE fell and the $VIX followed. -->

One of the most difficult questions to answer is “is it in the price?”. One might present a glowing story for a company with all the stars aligned - effective management, a break-through technology with promising rate of adoption, etc. All good. —-> But, if we subscribe to some reasonable version of market efficiency, we must ask “isn’t all that in the price”? It’s an impossible question to answer but the more accessible this info and the easier it is to access the investment, the more that question should matter.

In October 2012, fresh off the 2011 debt ceiling crisis and approaching the 2013 "fiscal cliff", I hosted an investor dinner in NYC featuring Senator Alan Simpson. Turns out it was the night that Superstorm Sandy wrecked havoc. We regrouped and had the dinner a month later. An imposing figure at 6'7 with a distinctive (Wyoming?) dialect, the Senator talked about debt and the "Simpson Bowles Plan". His speech was lively, direct and peppered with salty language. The best line of his talk was "the problem is, no one knows just how much a trillion is."

when thinking about the price of insurance, it's often useful to look at paying premium as reducing the risk of being very wrong. if I am really bullish on a stock, but also recognize that in markets, "sht happens" and I could be very wrong, best to look at the premium for a call option as a function of how wrong I might be. There is less risk of being very wrong for Colgate or Campbell's Soup than for TSLA. Same process applies to VIX options. if I buy a VIX call, while I may be betting that vol rises, I may also

a short series on hedging by way of a trade that did occur and one that didn't but would have worked well. Comparing Mark Cuban in YHOO to Elon Musk in TSLA and then broadening to current market pricing setup. ===> In 1999, Mark Cuban famously hedged the YHOO stock he received from selling Broadcast.com. He used a zero cost collar (long put financed by selling a call). The trade saved him a fortune. The pricing of the trade was gorgeous.

interesting to compare 2022 to other years with similar SPX realized vol. 2011 has same overall realized vol, but starkly different in other ways. here's 2011 and 2022, both around 23.5 realized vol, but giant diff in realized correlation. stock to stock correlation was much higher back then. a second notable difference is stock to bond correlation. in 2011, "risk on/risk off" was in full swing and 10y yields fell by about 150bps. This year, they have risen by roughly the same.

no doubt a lot of discussion coming on the quarterly SPX put spread collar roll. 3835 call strike is basically ATM and the collar gamma is now 1.7bln per 1% move in SPX. it's easy to isolate, but pretty difficult to disentangle the impact of hedging this position on the market. an interesting, forward looking question is on trade structure itself. while the "strategy" calls for a put spread collar, it's worth contemplating if this is optimal for 2023. so let's review. below, the quarterly puts and their value from inception to expiry. all finished OTM.

explaining equity vol through the "5 C's"... 1) carry generally supportive of current VIX/implied vol level. 10d realized is 22, 1m is 18. "theta hata's" might say that 5 day is just 16...fair point 2) credit...generally well-behaved. IG 30 wider since start of 2022. 3) calendar...holding vol up most are the implied action on 12/13 (CPI) and 12/14 (FOMC)...past that, beware the quiet might be worth considering into the holidays

catalyst week is coming! the "twin terrors" (for option sellers at least) await...CPI 12/13 and FOMC on 12/14. below, showing a snapshot of implied vol by strike in $SPX options that expire 12/13. what do we see?...1) vol is very high, a function of the fact that realized vol over last 7 CPI release dates is 50%. 2) the typical "skew" is INCREDIBLY flat. for the SPX, we show a stylized line for what skew might typically look like - reflecting a higher (and sometimes much higher) implied vol for OTM puts vs ATM puts and OTM calls

@SethLevine2 asked the question of whether the AE podcast might focus a bit much on the Fed. My answer, a bit tongue in cheek was "I just ask the questions". But I think it's proper food for thought and figured would share some views here on the topic here. First, the "remit" of stable inflation and full employment captures increasingly less of the Fed's impact. Sure, with rates high enough, you can blunt growth, shock asset prices lower and ultimately, push back on inflation. Similarly, an easing cycle is likely part of what

we talk a lot about recent prominence of the dollar in explaining asset price movements. SPX most neg correlated to the dollar in a decade...gold and SPX most + correlated to each other because they are both neg correl to the dollar. you can also see this in FX --> implied correl between Euro and GBP highest we have seen it...reflected in relative prices of 3 options...EURUSD, GBPUSD and the EURGBP cross. below, 1m implied vols and %iles (last 3 years)...note how EURGBP vol screens much lower %ile than EUR and GBP.

One way to think about risk is to put it in one of 4 categories. First 3 are obvious (and sometimes overlapping). Economic (asset prices respond to economy and profits); Monetary (CB’s rule the world, we’re here just to watch); Financial (positioning, vol & Minsky kind of stuff) and lastly, Geopolitical. This is a catch-all for “non-market market risks”. Debt ceiling, Fiscal Cliff, Scottish Ref, Brexit, US Election are among them. Int’l conflict as well. These can be more bark than bite but must be closely watched anyway.

posted yesterday on the idea that investors underappreciate the value of time in an option's price. we are seduced by "cheap" looking (low price) short-dated options. conversely we forget how long and painful it can be on the short side of options that have lengthy expirations. I also posted on "20 Things to Do Before You Ask for a Price" (below, again), a check list for the sell-side option salestrader to run through in quarterbacking the price discovery process between a client and the trader. Got me thinking about an exercise I used to do with