While we all know the VIX is the best known measure of SPX volatility, there are some different ways of looking at IV. Livevol has an IV30 measure that I think tracks VIX quite well, but puts a little less ephasis on put prices as the VIX. Since we use LivevolX extensively, this means we look at IV30 alot. One thing we always look for is when realized volatility in the last month passes IV30. We saw that happen today:
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:
LivevolX (r) www.livevol.com
The question is why? There are two arguements:
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.
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)
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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.