VIX spot is quoting $13.16, up 5.6% with IV30™ up 4.0%. The Symbol Summary is included below.
Provided by Livevol
This is a follow up to a four part series on VIX and the volatility of VIX relative to doomsday scenarios that were conjured up when the gov't shutdown was the top headline.
I also recently posted an article surrounding the idea of a market bubble which you can read by clicking on the title below:
Just the Facts Ma'am: Is the United States in a Bubble? Does the United States Look Identical to Japan Right Now?
The basic conclusion of this article is:
1. I see a market malaise in the options, and that is worth watching very closely.
2. Here's the thing, and there's just no way around it, while the option market has been pricing in low forward looking 30-day volatility in VIX, the option market has been dead wrong.
3. I posted a number of articles on specific names last week, namely TWTR, NFLX and GOOG. Now I'm looking more broadly at the SPX, and I see the same thing. Yes, implied volatility goes down (generally) as markets rise, as the holidays come, etc... But this doesn't feel right.
You can read the prior posts in this VIX series by clicking on the titles below:
11-1-2013: VIX - Doomsday is Over; But Did You Know This? I Didn't...
10-11-2013: Update #3: Doomsday Scenarios: It’s the Volatility of the VIX that is Our Signal; Not the VIX Itself
10-8-2013: Follow Up; It's the Implied Vol of the VIX that is Our Signal; Did a Bi-partisan Congressional Vote Bring us to the Brink of Another Great Depression?
10-3-2013: VIX - Doomsday Scenarios; It's Not the VIX that Matters; It's the IV of the VIX That is Our Signal
Let's go back in time for a summary, then forward to today and after.
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From 11-1-2013
The crux of those stories was simply this:
Those articles surrounded the idea of whether or not (or how) VIX could be used as signal to the potential doomsday scenarios that were being discussed if the US government defaulted on its national debt. The main conclusion I came to (which is my opinion) is that it’s not the VIX that is our signal, but rather than implied volatility of the VIX. I still feel the same way. Those articles and that time frame proved the hypothesis to be correct (for that time frame).
While the doomsday scenarios are gone, that story, the vol of the VIX still lives. And the story is moving rather quickly. On the spot price side we can saw the VIX falling from on high two-years ago to now (11-1-2013), quite depressed levels relative to the last five years.
But, you know where I'm going.. straight to the IV30™ chart of the VIX (the two-year implied volatility chart of the VIX).
11-1-2013
Provided by Livevol
That two-year high was the teetering point for the market - the line in the sand as I called it. Even though the volatility of the VIX dropped the next day, the market was actually down as was the VIX itself. But let's look at today (11-1-2013) -- the far right. We can see that the IV30™ of the VIX is right on two-year lows, and if we go back further, it's several year lows. There is a calm in the market that makes me feel... not so calm. Not because I believe we're going to have any kind of spasm in the market until year end (I have no idea), but for the future beyond 2013. What has me worried... Check this out.
Let's turn to the Options Tab, below.
11-1-2013
Provided by Livevol
Look at those green numbers across the top. Those numbers represent the implied volatility by expiry. And what about them?... they're getting lower monotonically (other than Dec) through April 2014. Here they are:
Nov: 62.51%
Dec: 62.92%
Jan'14: 59.21%
Feb'14: 58.40%
Apr'14: 54.84%
How confident are you that the market will not only stay at this level of risk, but will reduce substantially all the way though April 2014? The option market reflects a great deal of comfort; a new equilibrium, a relaxed and quiet equilibrium. Is there an event in the near future (before April 2014) that may be evidence to the contrary? If you said no... think harder...
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Ok, that was a summary of the prior posts. Let's turn to today.
The Charts Tab (two-years) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).
Provided by Livevol
On the spot side, we can see that VIX has maintained its depressed levels relative to the last two-years. We can also see a little move up in the last few trading sessions on whole.
But where do I really want to look?... Of course, the volatility chart. Let's turn to the IV30™ chart in isolation, below.
Provided by Livevol
The post on 11-1-2013 so the volatility of the VIX at 62.67% (so well above the current level). Just past week we can see that the volatility of the VIX hit multi-year low; that's the bottom horizontal line.
The second horizontal line simply marks the current level of the implied volatility in the VIX. Both levels are quite low (obviously).
Here's the thing, and there's just no way around it, while the option market has been pricing in low forward looking 30-day volatility in VIX, the option market has been dead wrong. How do we know this?...
Let's look at the identical chart above, but with the HV20™ added to the chart.
So the IV30™ (red curve) is what the option market was pricing looking forward (forecasting) while the HV20™ (blue curve) is what actually happened (the actual realized volatility).
Provided by Livevol
What do ya know...That blue line spikes well above that red line quite often and as of this writing we have:
IV30™: 56.83%
HV20™: 88.27%
So, in English, the option market reflects about 57% annualized risk over the next 30 calendar days in the VIX, while the last 20 trading days (which is about 30 calendar days) have shown ~88% annualized volatility.
So what? I think the option market reflects a malaise, a sort of sleepy view of forward looking risk. I posted a number of articles on specific names last week, namely TWTR, NFLX and GOOG. I have included those posts below. You can read them by clicking on the titles.
12-27-2013: Netflix (NFLX) - UPDATE: The Giant Killer is a Giant, But the Option Market is Still Asleep. What Happens When it Wakes Up?
12-26-2013: Google (GOOG) - Volatility Dipping; Has the Option Market Fallen into a Mistaken Malaise?
12-26-2013: Twitter (TWTR) - UPDATE: How the Option Market Totally Blew It, And We Knew it Two-Weeks Ago.
The TWTR one of course proved to be a total mis-pricing by the option market. The other two, we don't know yet.
Now I'm looking more broadly at the SPX, and I see the same thing. Yes, implied volatility goes down (generally) as markets rise, as the holidays come, etc... But this doesn't feel right.
Finally, the Options Tab is included below.
Provided by Livevol
Last time (11-1-2013) we saw:
Nov: 62.51%
Dec: 62.92%
Jan'14: 59.21%
Feb'14: 58.40%
Apr'14: 54.84%
Now we see:
Jan'14: 55.97%
Feb'14: 59.43%
Apr'14: 59.13%
Feb'14: 59.43%
Apr'14: 59.13%
I guess we'll see, but I see a market malaise in the options, and that is worth watching very closely.
This is trade analysis, not a recommendation.
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