The scariest part of today's action has to be the spike in the VIX back near 18. The VIX bounced its way down to the 12 level over the course of 2 years and this quick move up is going to cause a lot of pain for options sellers. Besides that the higher vol will require options hedgers to sell increasingly larger size into the market as it heads lower. Implied and actual vols are also used pretty heavily to measure the risk on trading books so this move really has the potential to pull liquidity from the market.
As I mentioned all the talk of hedge fund trouble this week I was a bit skeptical. A rising VIX makes me a lot less skeptical.
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