The Hindenburg Omen- Option Pit Style

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From Wiki:  The Hindenburg Omen

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Near Term HV at a Bottom

As we all know,  vol can go anywhere, but is unlikely to stay there.  While HV can touch into the low single digits for short periods of time, it doesn't stay there long.  Take a look at a 2 year chart of 10 day HV and 30 day IV

Chart - ^SPX - S&P 500 Index RTH_window_screenshot_0.png

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Notice that while IV is not at its lows, HV is in fact touching the lowest levels in two years. This would point toward one of two things

1.  HV has to rally

2.  IV has to implode

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Bond volatility is still cheap but the HV is not

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Argentina devalued the peso today along with China providing less than stellar manufacturing data.  It all added up to a mad dash for Treasuries and other safe havens like the Euro.  What a difference a year makes.   It was not too long ago that the run to above 3% in T-bills was a sure thing.  At least, over the last few weeks coming into 2014 that is not the case.

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TLT IV's Seem Too Cheap

It appears that the movement in the 10 year note has stopped being completely crazy.  However, this does not mean that movement has stopped all together.  In fact the 10 year and 30 year are both moving at a nice clip on a daily basis.  The 14 day ATR on the 10 year is still WAY above where it traded before the ‘taper talk’ began.  Looking at ETF’s that ATR of TLT is about 1.25 a day over the last 14 days.  Yet, take a look at the 30 day IV chart of TLT


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Why Won't the VIX Fall?

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.


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VIX, VVIX, Price and Volatility

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):


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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.  

GLD Vol Also In the Toilet

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.  


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If we look at actual GLD vol over the last 10 and 20 days, it actually looks somewhat fairly priced.


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SPX IV is Higher, Points Toward...a Rally?

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.


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The VIX is Low Because It Should Be

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.


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Is a Major Move in the SPX Upon Us?

Traders there are two very strange things going on in the option world right now.

1.  The HV IV spread is insanely insane.  With SPX IV trading at nearly 3X, realized volatility the market is pricing in options for a VERY big relative move in the near term.


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If we consider that, in order for the VIX to be this high and HV this low, expectations of a 1 or 2 day major realized vol spike must be the culprit.

This is further proven by our second strange thing, VIX term structure.

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