Before I get criticized for the nature of this blog, I’ll admit it is going to appear pretty cold and heartless. I actually slept on it before deciding to post it.
Yesterday mid-morning there was a plane crash in Brazil that took the life of one of the major candidates for President. The election is in early October and the financial markets have already been bracing for an uncertain outcome. One of the few areas we have witnessed heighted volatility in 2014 has been through the CBOE Brail ETF Volatility Index (VXEWZ). Despite already being elevated relative to other volatility indexes, it moved up pretty quickly as the news of the plane crash hit the markets. The chart below shows the front month future and spot VXEWZ Index during the trading day.
Note the mid-morning spike and then the gradual move lower throughout the trading day. I show this chart because it is a good representation of how implied volatility may overreact to a market shock and then adjust, usually to a lower level.