Deciphering Market Mysteries: VIX Decline and Skew Dilemma Spark Intense Debate on Wall Street

Deciphering Market Mysteries: VIX Decline and Skew Dilemma Spark Intense Debate on Wall Street 

During the weekend, we delved into a significant enigma that has arisen in the market lately – the continuous decline in implied volatility (VIX) accompanied by historically low skew. 

The conversation around this phenomenon has evolved over the past year. Initially, figures like JPMorgan's Marko Kolanovic attributed the VIX slump to same-day expiration (0DTE) derivatives, warning of a potential market crash akin to Volmageddon. However, this prediction has yet to materialize. Recently, Kolanovic, backed by JPMorgan's derivatives analyst Bram Kaplan, redirected the focus to call overwriting as the cause of artificially low volatility. 

Despite this, voices like Cboe's derivatives expert, Mandy Xu, challenge the notion, suggesting that if ETFs were truly responsible, the cost of bullish stock options would be lower. Xu implies that ETFs have a limited impact on volatility, attributing the subdued levels to a stable economic environment. 

The fixation on the VIX persists on Wall Street, particularly amidst concerns over soaring interest rates. Despite this, the VIX has remained below its historic average for an extended period. Various explanations for this tranquility abound, from individual stocks behaving independently to the surge in short-dated options trading. 

Regarding skew, recent observations indicate a significant decline in call skews, raising questions about bullish sentiment saturation. Goldman Sachs' Brian Garrett adds another layer to the debate, noting the unusual pattern where volatility during market rallies surpasses that during sell-offs. 

This market dynamic suggests a shift where downside risk mitigation takes a back seat, with options primarily seen as tools for amplifying gains in anticipation of market rallies. 

The recent dovish stance of the Fed and the S&P trading at record highs further cement this bullish sentiment, creating a market environment where betting on the next market upswing seems like a surefire strategy.