As we move into the end of the day, the week is punctuated by a real bout of weekend risk. Namely what will happen in the sands north of Baghdad as bad guys once again try take over a country? The Middle East has had their share of crises over the last decade but this one will be noteworthy for the lack of follow through on the part of the volatility markets.
If one throws a frog in boiling water, the frog will immediately jump out. If one puts a frog and slowly turns up the heat, the frog will boil to death because it won't recognize the change in heat in time to jump out of the pot. That seems to be the way traders are treating 10-15 point moves in the SPX. When the SPX was was in the 1100's or 1200's (way back in 2012) a 15 point move was about 1.25%, the equivalent of a VIX near 20%. Take a look at how big today's 13 point move was in percent terms:
Last week when the ECB made its rate and monetary announcements, FX option vols got completely crushed. Killed so badly that they touched low levels that we have potentially never seen. Now that vols made that kind of move, it is possible that we may have found the absolute floor in FX option vols. Take a look at a chart of FXE.
Just because something is priced low, doesn't mean it's cheap. Look at term life insurance, it costs almost nothing, but is NOT cheap because almost nobody collects on it. The same can be said for the VIX. In historical terms, the VIX is priced at a low level, a level it could be at for a while. Making matters worse, is that the VIX, while low, is not NEARLY as low as actual market volatility. Take a look at the chart below which shows 10 day realized volatility vs 30 day IV.
At least for now VIX hit rock bottom on Friday. There are several components to the volatility complex and VIX is just one of them. As far as the volatility futures are concerned they did break lower today for a while. VXX, which is made up of volatility futures, touched below $30 to record a new low for the year.
The current big news in the financial markets is how 'low' the VIX is. Nevermind that realized volatility is around 4% while the VIX is trading near 12, thus the spread is about 8 full points. However, I think its important to look at how long things can stay low historically. While it might seem like eons ago, 2006 was less than a decade ago. Take a look at the time period of Sep 2006 to Feb 2007.
Over the last 6 months I am not sure if there has been a product that has seens its IV get smooshed more than that FXE. However, in the last few weeks, all that has begun to change. Euro Currency is starting to move and ahead of tomorrow's meeting of the ECB the market is actually expecting some sort of pick up in movement either tomorrow or over the next few weeks. Take a look at a chart of the EVZ (the VIX of EVZ)
The big news right now is that AAPL did not announce any new hardware. There are hints and the developers like the new software, but the bread and butter of hardware is still not announced yet. That makes this conference a little different in that AAPL has held up pretty well after the big rally going forward. How it reacts next week is anyone’s guess.
To a large extent that will have to do with how paper treats the new AAPL stock around $90 bucks a share. I know the intrinsic value of AAPL is not changing but those smaller stock prices could bring back in the mom and pop players who were unfazed by the mini options.
As I write this the AAPL WWDC is going full tilt and the stock has not been able to hold up for most of the day. Granted it had a near $40 run up last week, $606 to $642, so a pullback is not out of the cards. That run also helped push the SPX to record highs on not the greatest news in the world. Part of that run is helping to damp down the volatility a bit in the big indexes of which AAPL is a part.