Markets went from complacency to panic in a very short time. We have been arguing that pretty much all global vols were too cheap given the possible global macro risks.

We have seen some sharp sell offs in equities over past few days, but is it time to panic?

Nobody has the answer to that question obviously, but one thing is sure, we have come a long way up, and US markets are down just fractionally from recent ATH levels.

SPX is trading down to the 50-day average around these levels, and there is a trend that has been holding since February. Should we break these supports, then the next big level is to be found at the 2800 level.

Interestingly enough, the small cap ETF, IWM US, has traded relatively “OK” given the moves in the SPX. Looking over past weeks the IWM US has done not much at all.

The below chart shows the net non-commercial positioning in VIX futures. This does not take into account other possible offsetting hedges, but given the move in volatility and VIX lately, it sure is trading as if “speculators” are short volatility.

The VIX move so far is huge if taken into account how little the SPX actually has moved. When panic strikes like it has done right now, it is wise to try outlining your scenario as well as always having the risk management in place. If markets are to hold, then volatility premium trades rather rich and can be used, all depending on your view and price objectives.

If this is a total collapse in the making, then risk premium will continue higher of course, but is that a likely scenario?

Source, charts by Bloomberg