Thursday, August 16, 2012

Dog Days of Summer

Since 1950, the annualized S&P500 volatility is 15.5%.  The one-day annualized volatility for the Aug SPY at-the-money options is 11% (i.e., expiring tomorrow). This is good news for Obama and the stock market. The chart below shows the implied vol in light blue, a 30-day actual trailing vol in white, from 2006-present.

Barry Ritholz links to a MarketTech report post that shows that VIX lows are good times to short the market (see below for VIX chart back to late 2011).  As the VIX and SPY are inversely correlated, this is really like saying that if you short the market at historical highs, it would be a good strategy.  The problem, of course, is that highs and lows are determined ex post.  In real time, it isn't clear the VIX is at a low.  For instance, the VIX stayed at this level from 1992-1995, and from 2004-06.  Just ask those who shorted USTreasuries at 'historic' lows  over the past 20 years.  


Anonymous said...

Barry Ritholz is a joke.

Mercury said...

Well, this time around there’s the added risk that you may be buying volatility from the Fed. More likely perhaps in the UST market than the S&P 500 but should make one pause before pulling the trigger. They’re running out of options at this point and I wouldn’t put it past them.

BRM said...

Part of the low VIX calculation is also structural to how they "roll" in their wight of futures. Sep VIX futures aren't at any kind of historical low (~18 and change).

Barry may want to also consider that sustained up-trends also usually produce a VIX that bounces along at lows as realized vol remains subdued. So, you know, also a great time to be aggressively short equities.