Today’s selloff is finally registering in index volatilities in a bigger way, and we’re net sellers here.  By no means are we saying that this is the widely looked-for “capitulation day,” nor does it mean that index IV can’t go much, much higher.  We’d be happy to sell some premium at higher levels, too.

Look, people are actually getting concerned about this Fannie Mae/Freddie Mac situation.  What if the greybeards in Washington screw something up?  What if these guys are (as the phrase goes) too big to bail?  Bad earnings are bad earnings, but this scenario has a gloomier worst case.  (Even so, some Citi analysts think the FNM FRE selling is overdone.)

Don Fishback wrote a great piece this week explaining why increasing volatility wasn’t registering in the indexes - the short answer is that decreasing correlation among individual names means, for instance, that rising volatility in an equity with -1 beta offsets rising volatility in an equity with 1 beta, leaving the index that tracks those names net even.

In any case, our snarky skepticism notwithstanding, large moves in implied index volatility are all about fear, and we are most definitely in the fear-selling business.