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
The earnings season has been a mixed bag so far. Mark commented about it on CNBC yesterday morning and the fact that IV is not really taking off. VXX is making year lows today and the IV in the SVXY (Pro Shares Short VIX futures ETF) is making a 52 week low today. Even with VIX cash up the VIX futures compressed a bit. The only thing cheaper than the IV is the realized volatility clocking in a at 7.27 for the SPX. The low volatilities seem to set a table for something higher down the road but we will need a catalyst. The earnings season has not provided one and the muted movement is having an effect on the skew in FB.
The VIX cash has been backward over the VIX futures for a surprisingly large portion of this month so far. The same cannot be true for the VIX futures themselves. Usually the sign of an official sell off, the VIX futures have yet to go backward since this sell off began. However, if we get one more day like today, I think that all changes. The VIX curve is about as flat as it can get without being backward:
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.