Whodunit?

There's a tool for that

Yesterday saw a melt-up in equity markets accompanied by an unusual sidenote. The CBOE Volatility Index (VIX) also moved higher. Yes, I know very well that this can happen and that it doesn’t foretell the end of times. But most of the time when SPX goes up, VIX goes down and vice versa. And the good news is that CBOE now has a tool that allows us to “decompose” the daily change in VIX to identify where that change came from.

Here’s what that dashboard displayed for the change from Monday to Tuesday. There are six components that they track and here is a link to their whitepaper that explains everything. As for yesterday, the big driver of the move was Parallel Shift - a rise across the whole implied vol curve. Basically, traders paying up for vol. On the other side, the move lower that we might have expected (sticky strike) went the wrong direction and there was also a drop in call skew. Net them out and you have the increase that hit the screen yesterday.

The other change that might not be intuitive came from the VIX Mix, losing three points to finish at 58%. SPX higher and vol attitude ticking more bearish. On the bright side, we’ve got 7 of 17 components looking bullish while two are in the red.

This most recent move for equities is pretty dramatic. SPX up almost 6% in four trading days and moving higher again this morning. You can feel the FOMO. Our VIX Mix trend line has turned back up but the implication for investor sentiment remains one of caution.

Today could be another “spot up, vol up” day with VIX currently north of 17 while SPY is up another ~60 bps. Going back to the decomposition, it’s important to remember that upside volatility is still volatility whether it’s folks bidding for downside protection or chasing upside participation. Just be careful out there, OK?

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