We all know the VIX has been in a range for some time. This blog has on several occasions argued that it may be that way for a while. Yet, even with the relatively stable and lower VIX traders have been pointing toward the 'vol of vol' for high option premiums. This is a somewhat flawed argument. Yes the VIX options do expire into a cash settle, but the real underlying is the VIX futures which are less volatile than the cash market even some of the more advanced programs look at HV in terms of cash VIX instead of the futures.
Based on how much things are moving around in the cash, VIX option premiums are at some of the most expensive levels I have ever seen. Take a look at the relationship of 20 day HV and 30 day IV in VIX options.
10 Days ago we posted on this blog that bond volatility was completely in the toilet. In fact, it was the lowest level we had seen in 2 years. You can read the piece here. We thought that the TLT might simply continue to drift lower. In fact just the opposite happened. Take a look at the pop in TLT Vol that we have seen in less than 10 days.
When traders see a wide spread between the VIX and Front month futures they often get confused or even worried. When in fact the opposite is usually true. Last month with 8 days to go to VIX expiration the VIX closed at 13.19, the April VIX future closed 13.60. A mere .50 premium to the cash. The VIX future ended up settling at 15.64. The month before that the VIX closed 11.56 (it’s lowest since 2006) the March VIX futures closed 12.95 on their way to a settle near 12.50. Today the curve looks as such:
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.
The last two weeks have been interesting for VIX and VIX futures watchers, for several reasons. In relation to the VIX, the realized volatility has been above implied for about 2 weeks and appears that it might stay there for a while.
The VIX cash is now trading at a discount of about .75 to the May future. Does this mean all is well in the world of VIX, and that we can sound the all clear?
No it does not, while IV is certainly in today, the VIX cash is actually trading at about parity with the May future. The weekend effect is distorting the current price. You can read about weekend effect here. Thus when we look at a VIX futures curve what is really going on?
I am a firm believer that the mini options are going to be a great thing for the retail trader long term, as long as the retail trader can steer clear of Television. There are 2 trades we hear more about on CNBC than any other trades. Those trades are GLD and AAPL. CNBC chatter is indicative of where the retail trader is investing. I wonder why the retail trader is still out of the market:
The SPX had a very ugly day today. Yet, I think this might be a short lived move. While the tragic Boston Marathon attack throws a small wrench in how the market might act in the coming days, I think the VIX is pointing toward a short lived sell off.
Take a look at how the VIX moved today and take note of how little it moved relative to theItalian elections, a day where the SPX moved LESS than it did today.
During the Vol Report Andrew made a great comment about what might have happened the last few days. With all the money now flowing to the path of least resistance (like a river), Ben Bernanke's put might actually be more like a straddle. The 'T.I.N.A.' trade, essentially forces traders to go long, creating a synthetic call. With the 10 year at near all time lows, Japan crushing its currency, and Europe...being Europe, money is flowing into the S&P shooting the trade higher. Synthetic Call, plus extra Puts: Straddle. Thus, I think we might be out of our 5% HV funk. HV may have finally found a bid.