With the FOMC meeting, and employment over with I thought today would be a good time to examine the state of SPX volatility. Is realized volatility high or low? Where is implied volatility in relative terms? What is SPX skew doing? How are the terms structured? Are there any specific trades that make more sense? Should traders be trading calendars? Is now the time for a butterfly? Option Pit is going to sort through this mess in the SPX and spit out our best guess as to what market conditions are and what could be the most favorable trades.
Realized 10 Day VOL:
SPX High-1129.24
SPX Low-1088.01
High-Low Realized Volatility: 18.60% this is much lower than it has been over the last few months. We have been watching realized volatility fall and fall. Traders, we are now back in the teens and heading lower.
Intra-Day Realized Volatility: average one day move, 11.908 a realized intra-day volatility of 15.82%. This is the lowest intra-day volatility that we have seen in a while. This also indicates that not only is the market not moving as much. The moves themselves have less whipsaw to them.
SPX ATM IV 30 Day Out:
SPX ATM IV in AUG: 19.05%
SPX ATM IV in SEP: 19.58%
Blended SPX 30 day IV: 19.44%, for the first time in a long time it appears that selling premium is working and working well. Traders are almost collecting a full point of IV over high-low vol, and even more over every other test of realized volatility. With all of the news out there, there does not appear any reason not to continue to think that market conditions will continue till close to Labor Day, although obviously, just about any time of world flair up could cause a problem.
SPX SKEW: The SPX delta put in September is trading at an IV of 26.8%. As a 137% of ATM IV in September. This is high in percent, but when IV's get this low it is important to look at absolute spread between the two which at less than 8 points is somewhat low. Obviously, when IV is flat there are trades that make more sense.
SPX Term Structure: no matter how the trader looks at it, any type of SPX term trade looks bad, SEP is trading between 1.5 and 2 points below October. This is common when market IV is low but long term fear is high. For the time being I think unless we see a spike in implied volatility in September, term trades make little sense.
After running through the numbers I would conclude the most favorable trade is probably the SEP butterfly. With extra long puts purchased to cover the position. The OCT which is high relative to SEP makes sense for a condor; while the skew is not steep at 137% I would not call it low either. Again the absolute spread though is less than 8 points. Going into October I think it would be a mistake not to buy an extra put or two. The market is predicting rockier times ahead at some point.
Don't forget to sign up for the free AM Pit Report, its informative and free. I will be giving a presentation for TradeMonster tomorrow. The final in my four part butterfly structure and adjustment series. Register here: TradeMonster
Note: in order for smoothness SPY was used for charts from LIVEVOLPRO instead of SPX
