I liked the special title there for our blog tonight. For the most part the activity in the volatility markets was pretty muted today. On balance some decent earnings but nothing to light a candle under the big indexes. The NDX was up about .33% so the CES show was not exactly lighting a candle under the technology stocks. I was reading a column in the WSJ not so long ago that the next technology innovations won’t be enough to spur economic growth or some sort of nonsense like that. Some professor was espousing this idea and it reminds me of a quote from the head of the US Patent Offic
As I listen to traders belly ache about the 'low VIX', I ask them, "why should the VIX be high?" They will usually point to a bunch of reasons, none of which are in the near term. Right now, the VIX is trading near 13.5 and for good reason. Despite last week's moves, realized volatility is in the toilet. With the market moving nowhere, traders are selling SPX premium in the near term. Does this mean the market isn't cognizant of the coming risk? No, not at all, the market is already pricing in a lot of risk after Feb expiration. Take a look at the VIX futures curve:
Yet again, I spoke to some unknowing trader that is worried about volatility rallying in the next few months. The trader suggested he buy VXX to hedge his portfolio.
Traders: NEVER BUY AND HOLD VXX. It is a piece of junk. This is a one year chart:
Livevol (r) www.livevol.com
Since inception, the ETP is off about 99% and will continue to go lower as long as VIX futures term structure looks like this:
Our COO Mark was asked by several different media groups why the VIX was so low today. After all, the VIX was just over 22% last Friday (a 52 week high); now it is trading at a 52 week low only one week later. Our answer was simple, the VIX is so low because it should be this low.
In the chart below, I point out when the VIX hits its peak on December 28 2012 (the yellow circle). I also point out that IV was 'predictive' of the movement that we saw on Monday and Wednesday (also in Yellow), when the S&P futures rallied 75 points in 2 days.
Now that the short term “big market” news is put away for a few weeks at least we can move to more mundane things like stocks and stories. We have remarked in some of our Volatility Reports that the VIX is coming into something like a fair price. It can easily move up or down 1 handles but for the most part it will take some effort to move it one way or the other from the 14 level. On the topic of single stocks HLF is making some waves so at least there are goodies to look at in the New Year.
Our COO Mark was on Bloomberg TV discussing GM options trading. A report from Nikolaj Gammeloft from Bloomberg news discussed how skew levels in GM puts were at the highest levels we had seen in some time. Mark was asked to develop a trade based on GM put skew, and his outlook for GM. You can watch below:
The last post of 2012 is a little bitter sweet. Overall a good year for equity returns but I can’t shake the feeling that we missed something and the market is holding back. Most of the big issues of 2012 are not on the front page anymore. Much like the end of 2011 a few loose ends are hanging around. One thing I find telling is that the bond prices (measuring by the TLT) did not continue their move to outpace equities. The Fed is going to keep buying but that rally looks like it is coming to an end. The most crowded trade of 2012 is ending up around nowhere as I have TLT up around 1%
It's been interesting to watch this fiscal cliff debacle develop. A week ago, I had the market pricing in a 92% chance of a deal getting done. Yesterday morning, the market was pricing at about an 80% chance of a deal getting done. Today, that number remains close to 80, although slightly below that now, near 75%. In fact, we can clearly see in this list of SPX weekly option vols what is driving up the VIX: