WHERE’S THE VOLATILITY?
Fool me once, shame on you. Fool me twice…It looks like volatility has left the building (upon first glance). Yesterday’s dramatic sell-off hardly put a dent in the volatility index as the index spiked at the open and then quickly scooted back to levels seen just two trading sessions prior.
Buyers of volatility have been whiplashed in recent months as economic concerns have sparked only brief periods of fear. The latest 100% surge in volatility during the Japanese earthquake lasted just a matter of weeks and corrected even faster. But a short-term perspective doesn’t quite do this metric justice. Volatility, by historical standards, is still elevated. In fact, it’s still in the crisis zone. Investors haven’t let the fears of 2008 leave the building quite yet.
So, we might ask - where is the volatility? It’s right there next to you. But we’ve all become so accustomed to headlines about crisis and imminent doom that the new normal in volatility doesn’t even feel new….What might look like near-term complacency is potentially not complacency at all. Rather, it’s just another sign of the very fragile state of sentiment in the current environment and the belief that Main Street is not entirely trusting of a sustained economic recovery.
The historical average of the VIX is actually around 19, so the current ~16 reading is somewhat low, though certainly not as low as pre-crisis levels (which one could be justified in thinking were low enough to indicate overvaluation in the market).
Thanks Jacob for the info.
For those interested in trading the volatility you might consider the VXX. This is not a pump and beware it can bite you.
Just made a buy at $27.14 a few hours ago…….. Wait a bit and pick up a little
more at a discount! LOL
VIX should be sub 5; God, via his only begotten son, Bernanke, has told us via the FOMC minute scriptures that “asset prices must go up”. Only a fool would buy protection here. The probability of sustained downside in stocks here is less than 0%. Please add mixed earnings to the list of things that cannot take this market down noticeably. I thought we’d hit 1450-1500 once we break the 1343 highs, but it feels like it’s more likely to be 1600 now, just for good all-time high measure…
Yes indeed, 1500 seem to be a couple of weeks away – and so does 150 crude, 1800 gold and 50 silver. And food…Whats that burning smell???
And after crude goes to $150 along with 1600 on the SPX, and then collapses when the commodity bubble ends, the powers that be will use that to justify further upside in equities to 2,000 LOL. This truly is the “can’t lose market”. I’m not sure Tepper really realized how “can’t lose” it is when he said that back in Oct 10. Just listen to the chatter box, long-only, head in the sand buy-siders yesterday on CNBC…”I don’t know why the market is down today gee golly, a downgrade like this of the US’s AAA status has been widely anticipated for years”…LOL, they will move the goalposts, as will the Fed to sustain its stimulus, as long as it takes to make the problems go AWAY!!
Ferro, I don’t underestimate the power of fed to back stop sharp drop in equities. However, it would be very naive to believe that they can have their way every way – somethings gotta give. I believe it would be commodities as continuous stimulus becomes their arch nemesis. Fed has always blown one bubble trying to prevent deflation of another. Can it be different this time?
They might call the vxx protection, insurance,whatever…but when the confussion & mistrust of all the powers that be become overblown- guess what’s in store!!! LOL
do you thing guys that volatility should be low as in 2007 or in 90s? I do not thing so. It is time to buy some VXX?
As an options trader I sit and listen to CNBC and they seem to continually talk about traders telling them they are selling vol when the VIX is low. I am not a typical options trader as I am primarily short vol (and yes we survived 08 despite being short vol) although I go long for hedging purposes. People seem to think in times when the Vix plunges it is a good time to sell vol as things are “stable.” All you are doing is leaving yourself open to whiplash; there is no free lunch when it comes to selling vol. I personally think the Vix is a little low for the current environment and should be in the 20-30 range as it was in the early part of the 00′s. Right now it is cheap enough to be long vol for hedging purposes and believe most investors that are able to buy protection via options should do so over the next 6 months. It allows you to continue to be long and tune out a lot of the noisy short term moves.
hey guys, great article on zerohedge about vix and the skew. long story short…vix isn’t the most accurate way to gauge “fear” or “complacency”
“Basically, VIX shows riskiness as implied by ATM options, while SKEW demonstrates the difference between ATM and OTM options.”
http://www.zerohedge.com/article/forget-vix-skew-tells-true-story-about-market-risk
good comment indeed…Cullen had a post on that : http://pragcap.com/the-fear-barometer. Still this skew indicator shows that market price historically low risk these days…skew has never been so flat !
whats new, a falling dollar, rising commodities, rising stocks, easy monetary policy, a so-so economy, and a brand new bubble.
My god, stay away from VXX. Look at a long term chart vs VIX and tell me it’s a worthy trade. The decay is terrible. At the rate it’s going, it’ll disappear to zero in a couple more years.
If you’re going to buy volatility in non-option format, as least go with VXZ. Still not ideal, but better.
Correct! Use the VXX only when sure of big downside and don’t linger. Get out or it will bite you.
I don’t know this for fact, but I think the option market (VIX) is longer the same robust market as before. There were equity, future, option before. Now there is huge market for all kinds of derivatives. VIX is no longer the key fear factor. If CDS market is in trouble, and VIX will not reflect that. That’s my guess.
Here is an idea from “The Macro Story” on VIX
Beyond The VIX Follow Up Chart
http://macrostory.com/?p=2500
I stick to VXX:) I expect beginnig of sell off next week. Good luck for bears.