A 99th percentile NASDAQ vol spike is the fade
Vol spikes on big down days usually become the setup for a crush once spot finds support. That's the gravity of vol we often talk about.
NASDAQ floating at-the-money vol jumped 4 points on this week's sell-off. That puts it in the 99th percentile.
The instinct is that fear is taking hold and you should be paying up for protection.
The mechanics usually point the other way. Finding a way to fade the panic safely is what normally pays.
When the surface gets pumped that hard on a down day, a big chunk of the move is just the surface sliding down its own term structure into a panic bid. The realised move justifies some of it. Vol cranked into the 99th percentile on a one-day flush.
That's the structural pattern. Panic bid in, surface re-anchors, then the moment the spot stops falling the vol gets drained back out faster than it came in.
OPEX is out of the picture. The seasonal window for the next move sits around month end and the Fourth of July long weekend. Vol tends to get smashed into long weekends unless there is a very good reason to own it.
The big caveat is the jobs data print next Thursday. Depends how much weight the desks put on it into the print. If the desks are heavily defensive into Thursday, they hold vol up longer. If they're more comfortable on the print, the crush comes faster.
For me, the base case is vol gets drained out into the long weekend setup.
I normally use VIX of VXX options to express these views so that if I'm wrong I don't take too much damage.
Imran
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