Friday, June 6, 2014

* VIX - 7-year Lows Breached. The Calm Priced into the Market is Stunning. But Did You Know This?

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VIX spot price is quoting at 11.07%, down 5.2% with IV30™ up 1.8%. The Symbol Summary is included below.

Provided by Livevol

This note focuses on the both level of the VIX and the implied volatility of the VIX.

UPDATE (on close of trading):

Provided by Livevol

The VIX spot closed at 10.73%.
  • Since 1996, VIX Has Only Been this low 60 Times.
  • VIX close has not been this low since 2-23-2007
  • For the 9+ Years Between 1996 and Summer 2005, VIX was Never this Low.
  • All-time Average VIX: 20.1%
  • All-time Median VIX: 18.4%
Source: Yahoo! Finance

Conclusion
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The risk of the risk of "the SPX moving a lot" is low... and the risk of "the SPX moving a lot" is low.

That's not actually just a fun tongue twister, it's an all out reflection by the option market of literally unprecedented low risk -- in two ways.  Read those, repeat them if needed, it's not a trivial conclusion.  The calm that is priced into the market and the calm that is priced into the likelihood of that calm remaining present are absolutely stunning.

It's interesting, but when I was making markets on NYSE ARCA and CBOE, I never saw a VIX level this low.
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For a clear understanding of what VIX is, you can read this post:
Understanding VIX (for real): SPX Options--> VIX Spot --> VIX Futures --> VIX Options: Know Everything




I have also written extensively about the volatility of the VIX (the vol of the vol).  I have some strong feelings about how that measure is also an indicator of market risk.  You can read the final in a series of posts on that subject, here:

VIX - Part 5: Doomsday/Bubble Scenarios: Its the Volatility of the VIX that's Our Signal; Not the VIX Itself

That series of articles surrounded the idea of whether or not (or how) VIX could be used as a 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.
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Now to today; let's start with a seven year chart of the VIX, below.

Provided by Charles Schwab optionsXpress

Here's the little secret... the VIX has just hit a seven year-low.  The S&P 500 as of this writing is headed for another record level, looking 1950 dead in the face. In fact, just as awesome as the VIX chart is, when was the last time you actually looked at a seven-year chart of the SPX.

Well... here it is:

Provided by Charles Schwab optionsXpress

When we say a bull market, we are referring to stocks (not the economy), and whether you are a believer in the future of this bull market or not, the rise has basically been linear... and I mean, straight up.  That chart is worth a "wow."

So, the question now becomes, is the market really in a state of essentially generational low risk?  That's not a question of a bull or bear market, that's a question of risk in any direction.

Let's go back to my presumption that it's the volatility of the VIX that is a signal by looking at the IV30™ chart in isolation of VIX over the last two-years, below.

Provided by Livevol

The implied volatility is the forward looking risk in the VIX level as reflected by the option market (IV30™ looks forward exactly 30 calendar days). So this is the forward looking risk of the VIX.  We can see some noise, but basically the risk as reflected by the option market in the VIX has been declining.

So this is a little to wrap your head around.  The chart reads that the risk of the VIX moving a lot is low.  The VIX measures the risk of the SPX moving a lot.

So.. the risk of the risk of the SPX moving a lot is low... and the risk of the SPX moving a lot is low.

That's not actually just a fun tongue twister, it's an all out reflection by the option market of literally unprecedented low risk -- in two ways.  Read those, repeat them if needed, it's not a trivial conclusion.  The calm that is priced into the market and the calm that is priced into the likelihood of that calm remaining present are stunning.

In English: The option market reflects in two-ways that the risk in equities (S&P 500) is lower now than it has been since the boom of the last boom. Do you agree with that?

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range for VIX of [10.90%, 13.10%] by the first tick of trading on Wednesday June 18th.

  • If you believe the VIX will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the VIX will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.



This is trade analysis, not a recommendation.






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3 comments:

  1. I think that non-complacency is converging upon a zero-point. The shorts have been squeezed out for months, the bears couldn't hold on any longer for that huge correction, and now have given up their positions for complacency. Reaching the apex of the zero-point, of course, is the zenith of complacency, which is the bifurcation point leading to the Minsky moment.

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  2. Is VIX is being manipulated?

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    Replies
    1. It's almost impossible to manipulate VIX on a large scale (the open on Wed of expiration might be manipulated). It a derivative of a derivative of a derivative of a derivative. Check this out: http://optionvol.blogspot.com/2014/04/understanding-vix-for-real-spx-options.html

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