Between SPX Volatility and VIX, Something Has To Give
Between SPX Volatility and VIX, Something Has To Give
Traders, something HAS to give in this marketplace. As many of you know, realized volatility has been in the toilet. This means that the market has been doing little to nothing for sometime. Today, 30 day Historical volatility is going to close at under 13%! That is unbelieveably low. We can see the slow move in the SPX, and its HV falling off a cliff in the chart below:
Graph from livevol (r) www.livevol.com
At the same time, the VIX complex is completely overpriced. The VIX cash is still trading over 18%, VIX futures are trading near 20, and the long term months have such a steep contango that many of them are trading over 25%.
This is insanely high relative to where the market is moving. But volatiltly is forward looking isn't it, One might ask...it is meant to be, but that is not always the case. IV is the markets best guess at where volatility might be heading. However, it is frequently wrong, espcially when IV is low. Take a look at a chart of the prices of the VIX since the beginning of the year.
Graph from livevol (r) www.livevol.com
The VIX on Jan 3 was predicting the market would move at 23.95% over the next 30 days. It got no where near that.
The trade:
Right now it makes sense to be short the Vol complex, and short SPX premium; however, with SKEW and IV somewhat low and HV in the toilet, it was SUPER cheap to buy units. Anyone selling premium is a fool, if they are not owning the 'teenie' puts. We like short term butterflies and condors right now.
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Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
To learn more about Option Pit and its mentoring services, please visit OptionPit.com
About Mark Sebastian
Mark Sebastian is a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. Along with his role directing the path of education for Option Pit, Mark is currently the director of risk for a private hedge fund. He writes a daily blog, the Option Pit blog, formerly Option911. Sebastian has been published nationally on Yahoo Finance, Google finance, Financial Times Alphaville and is a featured contributor for TheStreet.com. He is also published regularly at SFO, the Options Insider, and is one of the Co-Hosts of The Option Block Podcast, a featured Podcast from Options Insider Radio. Mark is the managing editor for Expiring Monthly: The Option Traders Journal. Sebastian has a Bachelor's in Science from Villanova University.
To learn more about Option Pit and their mentoring services, please visit: http://www.optionpit.com
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