Dec 4. Could faster normalization kickstart VIX?

–Given the Senate passage of the tax bill and ABC’s retraction of a key part of the ‘Flynn testifying against Trump’ story, the market reaction is somewhat muted.  Eurodollar contracts made new lows but have bounced.  In late October, TYH put in a low of 123-27, this morning’s low is 123-30.  Stocks are, of course, higher and bitcoin continues its surge.  But with increased institutionalization (CME listing a bitcoin contract on Dec 18) comes increased government scrutiny and intervention.

–EDZ7/EDH8 spread prints 19, so odds of a March hike following December have ratcheted up to better than 3 in 4.  It’s not so much a function of inflation or wages at this point.  Rather, it’s whether or not the Fed has the guts to lean against rampant financial speculation in equities.  If so, then curve inversion won’t be far behind.  And it may well be that improvement in corporate tax flows, compounded into the future, justify increased valuations.  However, the task at hand for the Fed would then be to normalize more quickly.

–Interesting summary of a Jim Grant interview with Alan Fournier.  The condensed version is that ‘volatility’ has become an income generating asset class, and Fournier surmises that many pension funds and other institutional investors have no idea what kind of tiger they’re riding.  Documentary preview:  The camera scans around an investment conference of well-dressed professionals.  The voice-over says, “How could all these intelligent investors, entrusted with the pensions of millions of hard-working Americans, have bought into the schemes pedaled by slick investment banks that volatility would never rise again?”

–Final note, the VIX position of short 12 puts vs long the 15/25 c 1×2 in size of 230k has reportedly been rolled from Dec into Jan.  I need to double check this info, as the open interest levels I see don’t reflect the change yet.  What I will say though, is that Dec 25 calls had a whopping 841k open, and while most vol sellers think they will be happy to see a pop that they can sell into, if and when it actually happens, they might get cold feet on the second leg up.

Posted on December 4, 2017 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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