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We all know the VIX has been in a range for some time.  This blog has on several occasions argued that it may be that way for a while.  Yet, even with the relatively stable and lower VIX traders have been pointing toward the 'vol of vol' for high option premiums.  This is a somewhat flawed argument.  Yes the VIX options do expire into a cash settle, but the real underlying is the VIX futures which are less volatile than the cash market even some of the more advanced programs look at HV in terms of cash VIX instead of the futures.

Based on how much things are moving around in the cash,   VIX option premiums are at some of the most expensive levels I have ever seen.  Take a look at the relationship of 20 day HV and 30 day IV in VIX options.

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10 Days ago we posted on this blog that bond volatility was completely in the toilet.  In fact, it was the lowest level we had seen in 2 years.  You can read the piece here.  We thought that the TLT might simply continue to drift lower.  In fact just the opposite happened.  Take a look at the pop in TLT Vol that we have seen in less than 10 days.

Livevol (r) www.livevol.com

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With the VIX up .05 to 12.86 as I write this the market is taking a long overdue breather.   For the last two weeks through good news and bad, stocks have rallied pretty hard.  For instance AAPL has moved a lot but really has gone nowhere.  I think the big winner has been GOOG running from around $800 to just over $900 in a two week span.  Let take a look at the volatility in there.

On May 3^rd the upside skew in GOOG was pointed down in the May 24 Weekly options.  I had the ATM volatility around 20% and the 50 point OTM volatility around 17%.  We call this a steeper upside curve as opposed to flat since the OTM options are trading for cheaper price pointing the curve down.

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I want to characterize today with movement.  AAPL trades from 441 to 422, GOOG trades from 894 to 916 and PCLN from 789 to 808.  Stocks are moving again and I alluded to that yesterday that the realized volatility for names is starting to pick up.  VIX managed up .04 but really the story is that stocks are moving and the reason is money is coming back into the market. I think this means that things that really were not possible with positions most of last year are possible now.  You can buy some options and have a shot at making money.  Let’s look at a stock in the basement, ZNGA.

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Memory is a funky thing in the market.  Right now many new investors and traders have the 2008 crash in the forefront of their minds.  I don’t blame them.  What we have had since then is mostly a declining volatility environment that has reared its ugly head on the big macro issues that faced us, namely the Euro and the US deficit.  Remember it was the 1-2 punch that set things backward in the summer of 2011 since it looked like a total failure by leaders to get a handle on the problems of the day.  Right now the trajectory appears to be better.  How do we know?  Every advance in fiscal prudence, even higher taxes, has been met with market rallies.  Bernanke was QE’ing back in the Fall of 2012 and the market did not really take off until the Fisca

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When traders see a wide spread between the VIX and Front month futures they often get confused or even worried.  When in fact the opposite is usually true.  Last month with 8 days to go to VIX expiration the VIX closed at 13.19, the April VIX future closed 13.60.  A mere .50 premium to the cash.  The VIX future ended up settling at 15.64.  The month before that the VIX closed 11.56 (it’s lowest since 2006) the March VIX futures closed 12.95 on their way to a settle near 12.50.  Today the curve looks as such:

www.vixcentral.com

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Well the Yen is in the can, the Treasuries are dumping and everything that glitters is a dud today.  Stocks though are mostly mixed while the volatility market is about flat to slightly up in the VIX futures.  As a continuation of last night’s blog I think our summer will be the Zone of Unintended Consequences.  I don’t know in modern history if a currency has been able to debase it’s way to glory (see Zimbabwe, Brazil in the bad old days and of course Weimar Germany). Maybe this time it is different but the by looks of the other Asian markets today  they do not like the result.  Let’s get back to commodities and specifically coffee.

The good thing about the stock market is that it is just like the weather in Maine.  Wait a day and it will change.  We wrote earlier this week that bond volatility was in the toilet and low and behold the market has changed course a bit. Why, the underlying assumptions can always change.  There were rumors floating that the Fed might curtail purchases of bonds and that sent the TLT down from 121.25 to 120.10 by the close.

As the SPX continues its rally though 1630 and toward 1650, may a novice is asking why the VIX isn’t touching all-time lows.  The answer is simple: volatility

When the VIX got to its recent low realized volatility was in the toilet.  We had been through about 2 straight months of nothingness.  10 Day HV was near 5 and both 20 and 30 day HV were near 10%.  Looking at HV now we can see a clear difference.  10 day HV is closer to 10% and 20 and 30 day are actually trading at a premium to VIX.

LivevolX (r) www.livevol.com

We have the market flirting with all-time highs again today and investors should be beginning to wonder if the financial crisis is over.  Asia looks ok, India ok, Latin America ok and the US recovering but in a pokey big government way.  Europe is still a basket case but that is mostly due to the reluctance of a good chunk of the population to work for a living and for the governments to stop paying for it.  At least short term the Euro should stay intact while the drudgery of budget discipline starts to happen.  While I won’t declare the financial crisis dead there is plenty of anecdotal evidence for that.  TARP was a success, Fannie and Freddie could pay back what they owe and home mortgage payments are now cheaper than rents