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Volatility broke…like, really broke.

I discovered this by accident. 

I spent all day trying to close a winning spider trade. The position was up 48% this morning before the CPI print. Markets rallied substantially after the data. My puts should have gotten crushed.

They didn't budge. In fact, some strikes increased in value.

Here's what's happening in my actual positions right now:

• January 570 puts refusing to lose value despite the market rally
• Far out-of-the-money strikes seeing implied volatility increase
• Multiple positions across different expirations displaying the same behavior
• 84 days out, trade is quietly accumulating volatility protection

The skew index confirms the unusual activity. We're sitting at 154 right now. There are only a handful of instances in history where skew has been this elevated. 

This measures the differential between put implied volatility and call implied volatility 30 days out. The bigger the gap, the more institutions are paying up for downside protection.

I spoke with traders today who manage risk for significant brokers. They're on the edge of their seats. 

Someone is buying back-month volatility very quietly in the backdrop. They're not buying short-term protection that everyone would notice. They're positioning 84 days out where most traders won't detect it.

The volatility indicators tell the story:

• VVIX (volatility of volatility) should have gotten crushed today but remains flat
• Three-month volatility measures holding firm instead of collapsing
• Volatility futures refusing to give up despite the rally
• Skew at 154, near historic highs

This creates a dangerous setup. You're at all-time highs with back-month volatility rising. The two don't jive together. Either the volatility is wrong or the price is wrong. History suggests it's usually the price.

I can't tell you why trade is buying this protection. I can only tell you it's happening right now. Markets rally. Volatility refuses to die.

Keep your allocation in check. Volatility needs to get the absolute crap crushed out of it for this rally to continue. Instead, it's quietly building in the back months while everyone watches the CPI celebration.

Video Length: 00:22:07

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