As a market maker and now a mentor, I have had a plenty of time to look at implied volatilities. In fact, that is basically all I do. Actually, if you are a serious trader that is all you probably do to. I know there is Labor day weekend coming up, but in my opinion the SPX September-October. As of the close today, this is the term structure between SEP and OCT:
With the crazy term spread difference I wondered what it was like leading into the 08 crash. I thought it might be interesting to see if how vols compare now to what they looked like 2 years ago.
Currently SEP ATM implied volatility is about 24%; October is a sky high 26%. This may seem low if looking at the last 2 years, but in actuality for two months that are NOT the front month to be trading that wide is pretty unusual. August is nothing like Sep or Oct, however, in theory September and October are supposed to be pretty similar. The skew of Sep and Oct are similar although, the Oct is flatter...on the upside. Save the higher ATM Oct vol the downside skews would be almost exactly the same in percentage terms.
Looking back to 2008, The SEP implied volatility was about 21.5 and the Oct was about 22. The implied volatility spread between Sep and Oct was actually about flat; although, Oct was slightly higher than Sep by about .50. While the SPX was at 1285 on this day 2 years ago the at the money implied volatilites are not that far apart. The curves themselves were both much flatter than the curves we are presented today. The SEP 2008 curve had a 10 delta put that was no more than 125% of the ATM vol (I can’t get an exact delta from the numbers I am looking at). The Oct had a similar curve, although it was clearly flatter than Sep in 2008.
Lets sume things ups here:
-IV’s, higher now in both Sep and Oct
-Curve, steeper today
-Inter-Month Vol spread-much wider today
So what does this mean? One of two things:
1. Oct is overpriced
OR
2. Oct 2010 is going to be worse than Oct 2008, although more properly priced.
You decide for yourself. If you think its 1, then sell a time spread, or put on a condor. If you think its number 2 then start buying puts. Have a great weekend!
