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.
One thing that is really interesting is how high realized volatility is in the VIX right now. While VVIX might be elevated, it actually pales in comparison to where realized vol on VIX cash is (even if the futures haven't been moving):
What causes this? One major thing to remember about volatility is that it represents standard deviations. The lower the price of the underlying, the lower the standard deviation should be. The VIX has, as you should know by now, really fallen off.
While the big news around Option Pit Mentoring is the VIX closing below 12 again, SPX is not the only major product with IV in the toilet. GLD IV is getting crazy cheap. The GVZ is trading at 6 months lows and near all time lows.
Last night in my webinar for RCM I discussed how I will use the VIX as a multi day indicator for trading. One of my key points, is that if the SPX is higher over several days, and IV is also higher, or not falling over several days, then IV is pointing toward a possible sell off. If we look at what has happened over the last few days, we can clearly see that IV is not really dropping and SPX is rallying.
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.
One of the things talking heads are constantly pointing to is the low VIX. It is 'complacency' they say, because that is a buzz word. The fact of the matter is the VIX is not cheap; the VIX is trading at a HUGE premium to current market volatility. Take a look at this spread:
The equity market had a pretty stunning reversal this afternoon. Essentially it rallied 1% from the lows of the day and the VIX took it on the chin to drop .67 to 16.45. Maybe a combination of the ADP report not being so bad and less silly rhetoric out of Washington got everyone into the holiday spirit. One place it did not help was AAPL.
I am always trying to teach my options mentoring students to find opportunity. The key is to understand what the opportunity, where the edge and what is are the risk. Take a look at FXE; the IV 30 of FXE just hit a 104 week low.
With no trading today, I was a little worried I wouldn’t have anything to blog about. Then an option mentoring student mentioned that we haven’t done The State of Volatility in the SPX in some time. It is incredible how the last time I was writing this, I was writing about realized volatility levels were in the high teens and sometimes threatened 20%. Now, we are in a situation where realized volatility levels are ‘elevated’ when we threaten 15%. While a week ago we did see the 1st movement on 2 days back to back in some time, it has been 4 months and counting since we had a real down day in the market. Add in the end of earnings season and the election next week and HV could be headed for another dive.