To show you how great of an effect that the Fed, Europe, and congress is having on the market, I thought I would point out something unique that is currently happening: Here is a quick look at volatility in the SPX
Livevol (r) www.livevol.com
Notice the IV (the red line), as measured by LiveVolPro, is coming in at a little over 15%. This is the lowest we have seen since May. This is because SPX HV (the grey line) is even lower. 30 day HV has been unbelievably depressed since Christmas. This in itself is not that unique. SPX IV of 15-17% is actually normalish (using LiveVol's calcs). Take a look at TLT (the long bond ETF) implied volatility:
Livevol (r) www.livevol.com
TLT IV is actually HIGHER than SPX and SPY IV, so is bond HV. This is an extremely rare occurrence that we only see under very strange circumstances. I actually would have thought that the FED, being more open, would reduce option IV. It appears to do the opposite. We also can’t discount the effect of the European markets on US bond volatility.
What does all this mean? There is certainly a trade there, but I am not going to dig too deeply into that here. The main thing that would come to mind is selling bond vol and buying SPX. It could also set up an interesting directional trade and cross market directional bet. Maybe one bets that SPY will move faster than TLT or vice versa in one direction or the other.
For instance, if I was bullish the market, I could buy SPY calls and sell TLT puts or vice versa. I could also consider selling TLT puts and buying SPY puts as a vol swap of sorts, if bearish. There are all sorts of other combos that could make sense as well.
It also points to the fact that even if Europe is out of the mind of equities, it may not be out of the minds of bond traders. It also could imply that there is some risk of major bond moves in the near future. Keep an eye on this one trader.
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