Friday, November 1, 2013

VIX - Doomsday is Over; But Did You Know This? I Didn't...

VIX spot closed trading at 13.28% on Friday, down 3.4% with IV30™ down 0.4%. The Symbol Summary is below.

Provided by Livevol

This is a followup to my 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 (check back in a few months for that).  You can read those posts by clicking on the titles below:

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

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.

This is also a followup to the story I posted earlier today on GOOG.  You can read that post by clicking on the title below:

Google (GOOG) - Implied Volatility Dives; Is Malaise Driving the Market to Carelessness?

Let's turn to the two-year Charts Tab 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 price side we can see the VIX falling from on high two-years ago to now, quite depressed levels relative to the last five years.  That spike in the chart a few days ago is just a small data error, I don't believe the VIX spiked to 22% then fell again (right?).

But, you know where I'm going.. straight to the IV30™ chart of the VIX (the two-year implied volatility chart of the VIX).

Provided by Livevol

That two-year high was the teetering point for the market - the line int he 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 -- 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.

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...

This is trade analysis, not a recommendation.

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