implied volatility

  • Treasury futures are finally starting to move

    the financial futures report

    Implied volatility in the S&P 500 is in the tank, is this a sign of things to come?

    Traders have been asking themselves all summer how low volatility can go. Thus far, the question hasn't been answered. Although it is true that we never expected volatility, and specifically the VIX, to reach the depths we've seen in recent weeks, we also know this is not a permanent market state. In the moment, complacency can feel like it lasts forever, but in reality it never does.

    The chart above depicts the implied volatility of S&P options on futures according to MRCI (implied volatility is simply the expectations of future volatility built into option pricing). It is apparent that as we approach 8% in implied volatility, the odds are swiftly in favor of a change in sentiment (higher volatility and likely lower stock prices). According to this study, the implied volatility has never dipped below 8%, and has bottomed near 8% on two other occasions since 2002.

    Now is (roughly)the cheapest time in well over a decade to by S&P put options. It might be worth having a few lottery ticket flyers out there. For instance, the December 1850 puts can be bought for about $425 and give you 100 days in the market with risk under $500.

     

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