Non-Farm Payroll Insurance with the (VIX)

Very heavy open interest has surrounded the CBOE Volatility Index (VIX) over the past few weeks.   Much of this has been concentrated around the following strike prices:

  • July 20th Expiring 25 Strike with Open Interest of about 215,000 contracts
  • July 20th Expiring 30 Strike with Open Interest of about 211,000 contracts
  • August 17th Expiring 30 Strike with Open Interest of about 172,000 contracts

Much of this has been developing as the European Debt Crisis continues to expand with the latest coming from Moody’s downgrade of Portugal.   The recent run up in stock prices however has contributed to what appears to be institutional players buying insurance.   There is just too much going on right now in global markets not to be skeptical of the instantaneous rebound in the equity markets.

Tomorrow’s Non-Farm Payroll Report will surely usher in some insight as to where the market may be headed in the short term and how much interference we can expect from the Monetary Policy Team (FED).   Consensus is showing growth of 105,000 payrolls and an unemployment rate stuck at 9.1%.

Some of the key players such as Goldman, Barclays, JP Morgan and Deutsche Bank seem to have a fairly wide deviation in estimates.   This means that we could be in for a wild ride tomorrow if there is any surprise on either side.   Over the past few months, most institutions have been bunched fairly close together on their estimates.   However, with a 100,000 payroll spread between JP and Deutsche, there could be some jockeying for positions when the number comes out.   Also, to throw another wrench into the equation, the ADP Private Employment data showed a much greater than expected build in payrolls of 157,000 vs. 70,000 and initial jobless claims came in slightly better at 418,000 vs. expectations of 420,000.

Over the past 4 months, ADP has been a pretty good indicator of where the BLS Non-Farm Payroll Number will end up.   We will be planning for a number higher than expectations at around 150k and an unemployment rate at 9.0%.