There are many people smarter than us calling for a new vol regime. While we are not 100% sold that is the case, we can say with certainty that a VIX with an 11 handle is going to be very difficult to get to in the next few months. Why? Realized volatility. The market is moving again, something it did not do for months on end. Take a look at 10, 20 and 30 day HV relative to SPX implied vol.
The S&P 500 has blown up higher and is now closer to 2100 than 2000. Yet the VIX continues to be firm holding above 13.5, even in a somewhat low realized vol enviornment. It is pretty clear in the chart below:
1. As we rally longs are hedging. This is the bull case. Baseically, those with long positions like being long and are buying hedges with the market at all time highs and the VIX at, relative to longer term trends is somewhat low.
If you arent aware that the VIX is about half of itself from its peak last week, its time to take notice. What is interesting is how right the VIX really was at the time. leading into the sell off the VIX was creeping higher, closer to 16 or 17%, climed to above 20% pretty quickly and topped out last Tuesday when it settled lat about 26% or so.
With 4 ½ weeks to go in the VIX Aug cycle, there is not a lot of enthusiasm for the August VIX future. Is it cash too high or futures too low or just a combination of them both? There was an average mark up in VIX due to the weekend but not much more than that. Stocks sold off but really did not have a lot of gas to keep going down.
As we move into the FOMC minutes release VIX is down around .43 today to 12.21 at midday. In reports past the VIX has generally held steady up to the report but 2014 is starting to look different. The FOMC is probably going to continue to exit their bond buying routine and let the economy stand on its own. They might even signal rate hikes sooner. With the inflation report today it would seem the market wants some inflation.
Last week when the ECB made its rate and monetary announcements, FX option vols got completely crushed. Killed so badly that they touched low levels that we have potentially never seen. Now that vols made that kind of move, it is possible that we may have found the absolute floor in FX option vols. Take a look at a chart of FXE.
Yesterday, SPX down 12, VIX up 1.6 points. Today, SPX up 11, VIX down .6. This points toward a continued ramp up in volatility and fear in the market that is complex enough that the media aren't picking up on it, but simple enough that most traders see what is going on and are not wondering if, but when. Well, based on the action today, I would say soon. Below is a chart of VIX and SPX. Concentrate on the 50 DMA (the red line)
Since the end of the congressional stand off, the VVIX (the vol of VIX) has done one thing: plummet. For a brief period, VIX vol hit periods in the 50's, levels not since these options listed in the mid 2000's. Take a look at how low 30 day IV has gotten in VIX optoins.
There are two main ways to correct. One comes with a drop in the underlying price of the market. This is something we saw in June when the market fell over 5% from the top. The other is a time correction, a time correction is typically when stock or index sits in a range, while its IV sits, then the stock begins to rally after a period of time. In a holding pattern, when IV rallies, typically there might be a sell off.
Right now, the current SPX holding period does not look like a sell off, the VIX is in a holding pattern along with the SPX.