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Bicentennial VIX Parade

Adam Warner, at Daily Options Report, on the VIX.  

Bicentennial VIX Parade

 


One rather ugly week after expiration, we see financial stocks going to zero, commodities going to the moon, and the VIX hovering around the low, but wildly important 19.76 level.

OK, it’s not important, just low.

And a see a whole lotta buzzin’ going on about this Bull Market in complacency. So I’d like to take a moment to reiterate something I noted last week.

Option markets anticipate volatility of the underlying product between now and when the options expire. If there is segment of time between now and when the options expire that traders expect the market to be slow, they will lower bids accordingly. This has the effect of lowering statistical volatility readings without lowering the perception of *real* volatility going forward.

Obviously options do not always estimate future stock volatility correctly. In fact they never get it exactly right, it’s an estimate. Surprises happen. But all things being equal, we are not going to be volatile over the next couple weeks. If you see a low VIX, you can call it complacency, or you can say that it’s simply a realistic anticipation of non-activity in a traditionally slow stretch. I am going with the later.

And I am using VIX for simplicity sake, but it’s for every option.

The point is that IF volatility looks low and you are inclined to call that complacency, and then are inclined to use that perception of complacency as a sign to get bearish, be very careful.

Yes, it’s noteworthy that in this time of Fannie and Freddie meltage, there’s no evidence of Fear. But by the same token we have 10 slow calendar days in front of us, so it’s perfectly rational to lower bids ahead of that.

Again, at this particular juncture in time, the VIX futures and options provide a better volatility gauge than the *cash* VIX. And they have barely budged, as the market expects 22+ volatility in September. The fact that there is a premium in the futures is expected, in fact, barring an actual uptick in fear, it happens every time. As I noted last week about the VIX Sep futures, "These are trading markets, and as such will price in the holiday. Right now they expect about a 23 VIX in September. It’s likely over the next couple weeks that the *cash* VIX will drop, while this will stay constant. If that in fact happens, i.e. you see an unusually large premium from the futures to the cash, it’s not all that meaningful. If it deviates however, that’s something to note."

 


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