Since the end of 2008, despite much talk of a turbulent market the VIX has been heading on an almost perfect down slope:
While it has had points where it has popped for a few days or even a week or two, the index has not had a sustained rally since summer of 2010. In fact, sans a nuclear meltdown, it is a good 6 months since the market has seen ANY action in the VIX. Could this be changing? I do not know, however I am sure the technical analysis crowd is starting to look at support and resistance levels in IV. Personally, I do not buy into long term technical analysis in IV (I do buy into short term movement though). The only long-term thing I believe in is mean reversion, that said take a look at this:
Notice the three arrows: The first is the last low point in the SPX, notice that SPX IV at arrow 2 is higher than it was at point 1, despite the market being higher. Our current IV could go either way; it could become a lower low in the SPX and a higher high in SPX IV. That combo might imply that the market has topped out (of course it might not).
When IV's are low it is very easy to get fooled into selling these blips and counting on the market to rebound. One of these days that trade will not work. I would strongly suggest insuring a sale into this uptick in vol for the following reasons:
1. IV is not that high relative to where it has been over the last year
2. Skew is not crazy steep
3. VIX futures are not trading at a huge premium.
All of the above tell the trader that insuring makes sense, and those that do not are asking to be called fools if the SPX takes a dive. There is nothing worse than getting caught with your pants down into a crash. That said, put IV is actually somewhat expensive. In relative terms, this sets up well for credit spreads and some condors.
Do not forget our special class on trading ETF's begins on Tuesday. Time is running short to register, go here to sign up. If you have interest in the Vol ETN's or the Metal ETF's this is going to be a great course.
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graphs from LiveVolPro
