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.
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
Our COO discussed, remotely from Detroit a trade in Ford Motor Company today. Watch the video here:
The basic jist of the trade is that the stock is at a 52 week high, and while IV is also elevated in the earnings months, it is not especially high ahead of earnings. July12 and July20 are both somewhat cheap and have a flat term structure.
There are plenty of people who do not love GARCH HV measures. I am one of them. However, they are still good for showing clear examples of how much the market has been moving. An even better volatility study though is Average True Range or ATR. Currently 14 day ATR in the SPX is over 20. That is SKY HIGH.