From S&P Dusk Till Dawn

As we head into fall, the S&P500 and VIX have continued their respective churn up and retreat back. The end of the world was briefly interrupted today when Russia extended their proverbial olive branch with promises to ease aggression in Crimea, slamming crude oil futures further down 2 handles. The brief escalation in the VIX retreated back down, breaching critical points of support to close today at 12.42 with a 30-day forward looking volatility of 56.96.

The S&P advanced 45 points since last Friday, rejecting the 1910 support and spurning it upwards to the next critical point of 1960. Let's take a look at some options skews:

Options skew in $SPY

Above is the options skew for $SPY representing the weekly expirations for August. Looking at tomorrow's expiration (the white curve), we can extrapolate that Wall Street is expecting one of two things for tomorrow (Friday):

1. Traders are expecting the S&P500 to reject the 1960 level and retreat downwards with the 1945.5 to act as the first level of support. Some are pricing in the possibility of a further waver to 1935 with a 6% probability (based on the .06 delta for the weekly expiration).

2. Another group is betting on the possibility that the bulls will defeat the 1960 resistance and finish the week with a rally.

Let's look at what the $VIX has to say:

$VIX with this Friday's and Sept. expirations

The $VIX weighs the possibility of a 1960 level rejection higher than a rally based on tomorrow's expiration. Looking at September's expiration, traders are taking the position that in the slightly longer term, the S&P might be out of fuel for a rally or that some of the temporary decline in geopolitical escalation will not last.

Let's not discount the fact that this year has seen the use of a very popular strategy called the short-squeeze. With the increased level of anxiety in the markets as of late, traders have been covering their long positions with puts and shorts. The bigger players have been calling out the bluffs by churning equities and index highers, causing bears to cover their shorts.

Don't get fleeced; see you at the opening bell.