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.
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 of the things talking heads are constantly pointing to is the low VIX. It is 'complacency' they say, because that is a buzz word. The fact of the matter is the VIX is not cheap; the VIX is trading at a HUGE premium to current market volatility. Take a look at this spread:
Much has been said of the 'low VIX' right now. I would question whether the VIX is really that low. Consider this, the last 10 days, the market has moved at a less than 7% annualized rate. Over the last 20 days, the movement has been about 11%. Even 30 day HV, which includes some of that mess from the Election, is near 13%. Yet, VIX is near 16%. Take a look at the way it looks on a chart from LiveVolEx
For the second day in a row, we have seen the SPX break a significant 'technical' barrier. Yesterday the SPX failed to hold 1400; today the SPX on another decent sell off broke the 200 day moving average. To some this would be considered a MAJOR bearish sign. Yet I think it could be different. Below you can see a chart of the SPX and its ugly day.
One of the things we focus on in our option mentoring is understanding VIX. We teach our option mentoring students to watch the relationship of VIX cash and VIX futures, as they can get out of whack. Well, let me tell you, they are WAY out of whack right now. A great resource to watch the VIX futures is VIX Central. On the site, Eli not only has the current VIX curve, but the curves of every date going back to 2008. Here is the curve from today:
This is the question so many of my option mentoring students are asking me. I also get tons of questions from the option profits people on this as well. In fact, just about everyone wants to know if the VIX HAS TO RALLY???
The answer is, hisoricially, yes, but in relative terms, the answer is in the graph below. Take a look at this chart of 30 day IV relative to the last 10 days of trading (the Red is 30 day IV):
Many of my option mentoring students were wondering about the move priced into GRPN options today. The stock 7.5 dollar stock, into its earnings had an incredibly high volatility, almost all of it priced into August options that expire tomorrow. We can clearly see the vol pump in GRPN Aug in this cut out fromOption Vision (a new analytic tool we will be using here at Option Pit with some regularity).
As many of you option traders know, the VIX closed below 15 for the first time in some time. While I think the VIX is getting pretty cheap, when we look at all of the equity vol indexes, some equities look even cheaper. There are few things to remember:
1. While a 15 VIX might seem low after the last 4 years, it would have been above normal between 2004 and 2007.
2. There are always things that are more cheaply priced.
3. There may be trades that are more expensive in relative terms.
I semi-regularly to a segment called three VS Trish on Bloomberg TV. I usually try to come up with some sort of simple option play against a trade idea. For those of you who caught my segment on Bloomberg today, the discussion was about ways to trade the Euro against the dollar. Here is the video: