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.
Looking at the rally Thursday on what I would say is so-so news I am reminded of the fact that over the last year most of the melting has been to the upside. The market has tended to take off like a shot with Fed easing and the BOJ declaring war on interest rates. The US market with a decent dividend yield is starting to look attractive all of a sudden. While I am still mild bullish it pays to take a look at how the market is viewing volatility in the near term.
I have been closely watching the VIX curve over the last month for signals that this rally could end in the near future. Since March 12th, the SPY is about 1.10, a little less than .75%. In that same time the VIX has made exactly NO movement. Take a look at the VIX curve from March 12th vs. today:
It is incredible how similar the two curves are. If there is any difference, its that the current curve is slightly flatter, but barely. I might look at that as a hint, if there was any difference in the option market, potentially a much higher VIX might point toward some change.
On Friday's I host a podcast called Volatility Views with the great Don Schlesinger. He has many great sayings, but perhaps his best is: "There are options that should be sold, and options that should not be sold." Right now, I think Don would clearly say now is not the time to sell options. The SPX is right near its all time high, not fundamentally important. But what is important is where IV's and HV's are currently trading.
The VIX closed at a 6 year low today, trading near 11.56 on the close.
Today is a clear example of times where the VIX is misleading. Yes, the VIX is down today, but that does not mean that IV is necessarily lower. We are going to look at a chart of SPY options from Option Vision. When IV is up on a strike, the strike will turn green. When IV is down the strike will turn red. The deeper the color, the more IV is moving. Take a look at the color that SPY options are turning today.
One of the interesting things to watch, that I think shows how jittery this market is, despite the rally, is the actual volatility of the VIX. Over the last 10 days, the Vol of VIX (not VVIX) has been near 220%.
As I write that little gem it was one of the first things I learned as a market maker. To be more specific what I learned and what I taught was as a market maker you make the paper pay for your uncertainty. If the tape is starting to go to a place you are unsure of, raise the volatility. That is a mantra I always go with. We spend a lot of time in the Option Pit Gold Courses trying to teach our students how to read the tape. The “tape” is the price and volume action in any particular time period.
It is news when the VIX cash settles at a level that is higher than the VIX futures. I think it is an even bigger deal when the VIX settles above 6 futures contracts like it did today (almost 7, actually). Yet, there was something that was also interesting about today, the movement in the VIX futures themselves. While the futures certainly reacted to the news, the entire curve really didn't flatten up very much.
One of the things we concentrate on in our option mentoring is trading indexes. There is plenty to be made in the index space, typically on the short premium side. In the case of all the indexes IV has been overpriced for so long, all the way down to these levels, and continues to be overpriced. Index IV has been overpriced for going on a year and half and there is no end in sight. Perhaps the worst offender is NDX, especially in the past few weeks.
Take a look at the way the Index has moved since the beginning of the year, or more...HASN'T moved.