Possible Short Squeeze in the SPX
by Steve Claussen on October 14, 2009
The CBOE SPX Volatility Index (VIX) is now below 22.5%, reflecting the downward-sloping volatility skew curve. As the market goes higher, those upside S&P 500 Index (SPX) calls that had lower implied volatility valuations are a larger piece of the volatility matrix in the calculation of the VIX.
My source in the SPX pit is reminding me of the huge open interest in the October 1100 call strikes. More than 96,000 contracts are open. Assuming dealers and market makers are predominately short these options, any move higher approaching this strike will likely be exaggerated due to these dealers hedging the short gamma from this position. This creates conditions ripe for a short squeeze. Every percent higher the market rallies means more stock needs to be bought. Potentially, 1% moves could turn into 2% moves!
If you enjoyed this post, make sure you subscribe to my RSS feed!
Related posts:
- Heavy Activity in American International Group (AIG): Sign of a Classic Short Squeeze?
Tagged as:
SPX,
VIX
