As many of you option traders know, the VIX closed at the lowest point since April 20th, 2010.
At that time we were experiencing, a market that was on the rally and IV's were on the decline (like today). However, once we hit this low point, the market almost immediately turned around. Many point toward the Flash Crash as the beginning of the last tumultuous time period, but in truth, volatility had already bounced off of its lows prior to the crash itself. In fact, even without the flash crash, May 7th would have been a rough day of trading. Reaching this low in the VIX will certainly grab some headlines proclaiming that a sell off is near, but is it? How similar is the February 8th, to April 20th in terms of volatility structure?
The Volatility:
While it is true that the ATM IV's are about the same, there is one thing to consider, 13% of 1325 is a lot more movement than 13% of 1205, I know it sounds a little too simplistic but as we know, in general as stocks rally, IV's fall and vice a versa. Thus, a identical volatility on a more expensive strike does mean that the market expects more movement in terms of absolute price movement, even if it is the same in terms of percent movement.
The Skew Structure:
Here is then:
Here is now:
Notice, that despite currently having a low ATM IV and lower 30 Day blended IV, the downside skew actually has a higher implied volatility than it did in April. While certainly not a massive difference, it does imply that there are some players that are buying downside, or at least not selling it. This indicates a little more skeptical market place, or at a minimum more logical.
Term Structure:
Here is then (30 day IV was around 13.24):
Here is now (30 day IV is at about 12.95):
This is where we see the huge difference between then and now. Back in April every trader was trying to sell as much front month as possible. This created a massive volatility contango of over 1.5%. This also contributed to the huge sell off, with everyone short the front month (and hence gamma) when we sold off, the move was amplified as shorts covered. With the months more uniform the structure points toward less blind selling and a market that seems to make more sense. We aren’t looking at structure where the 30 day volatility is disgustingly lower than 60 and 90 day IV. A more uniform term structure implies a more lucid market, a market that is more orderly.
What does all this mean? I would point out that the term structure story is somewhat better than it was back in April. The vols of the different months actually make sense. I also like that the slightly higher skew is present. This implies there are participants in the market protecting themselves, something that will actually help avoid panic selling.
All and all, aside from about the same VIX, there do not seem to be the same conditions in place as there were in April. Even so, if we got a selloff I wouldn't be shocked. I just don't expect it to happen over a 2 day period and in the dramatic fashion it happened last time. A proper structure like we have now will keep major spikes under some control (more like we saw on the 28th then what we saw leading into the 7th).
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Graphs from LiveVolPro.
