Records, records everywhere today as the major indexes posted new highs for the year. I don’t know what the headline rally was that got the buyers excited but there are some choices: first day of the quarter, POTUS goes around Congress on immigration, so-so economic numbers, Iraq is still a mess, etc. In short there was no good reason for the rally except that we are in a bull market as global economies shake off the financial crisis. It will probably stay that way for a while.
With more than two weeks to expiration, this is a pretty light spread. When taking into account that the cash VIX is in the 11's and the Future is 12.45 this is incredibly low. Basically, traders think that a cushion of about .95 and a VIX future of less than 12.5 is plenty of spread to handle any upside risk in VIX. Why?
A dead day is a dead day. And today the market is living up to its low volatility number by putting in a .14% drop today. That is hardly enough to register on the VIX-o-meter. Any little blip in activity stands out more on a day like today.
Note the activity in the AVP Aug 13 puts. Paper bought a big block of puts and most likely this was tied to stock. As we move forward earnings are usually on the 1 day of August in AVP. This is pretty early in the earnings cycle to buy a big chunk of juice.
I spent most of the day trying to find places where one could buy premium and have a reasonable chance of success. The answer was not in equities, metals, or even in crude. But there is an area where risk seems to be appropriately or even underpriced: credit. Take a look at this chart of TLT and its IV 30 vs HV 10 and 20.
Just about every source has written about how, the VXX is what we thought it was: a good way to day trade volatility and a terrible vehicle for tracking the VIX. We have written about it multiple times. , Bill at VIXandMore has, Jared at Condor Options has, actually just about everyone has. However, very rarely do we get such a clear example of how the ETN fails as a multi-day VIX tracker than we saw over the last two days. Take a look at this chart:
With Syrian warplanes getting into the mix stocks took a slight pause today. Between Syria and Iran the ISIS militants have found a more able adversary. Early in the session the NDX was moving into some lofty ground but by the end of the day started to head into negative territory. The only names still up were Treasuries and the volatility products.
If one were to look back at the last 20 days of trading and compare it to the previous 10 years, one would be looking at just about the least movement over that 20 day period over the last 10 years. In fact it would be one of the slowest periods ever. Once today is included in the number, expect realized volatility which in TD has measured around at 3.4% and in Livevol at around 5.4% to drop to about 3.25% and near 5% respectively. Regardless of the HV measurement, both would have to be considered just about the lowest measured level in the last 10 years. The only period that comes close was around January of 2010. Take a look at how things have fallen off:
There has been an astonishing ammount of call option volume in many utility stocks over the last few days. Traders have bought upside calls in SO, ED, AEX and many other major utilities. Where we have not seen the same action has been in the ETF for utilities. Check out today's action and overall open interest in XLU.
The big action today was in the price of gold. Stocks managed to eke out a new high but gold was really the kicker. Maybe the threat of inflation is back in the game but gold for sure was up around 3.5% today. We had looked at gold volatility in the Option Pit Chat this week and we thought it looked cheap. The 10 day straddles were pricing a 2.10 move and the move today was 4.27. So much for the implied volatility being correct.
The Fed is staying the course and winding down their bond buying program. We have some higher short term rates but lower long term rates on the horizon as growth is better but still slow. That is exactly what the Fed wants. Slow and steady wins the race and for now stock like the news. Maybe we can catch a bit more rally if we can put the Middle East genie back in the bottle. For now VIX is taking a thumping as the good economic