As expected, Thanksgiving’s approach has dampened volatility in the market as traders take time out for the holiday. Realized volatility in the SPX index has actually picked up in the last few weeks, but the VIX sits near 3 month lows as a result of the holiday.
Here is last week’s snapshot:
Compare that to today:
Dec through March is down 1.5 to 2.5 points, and the farther maturity futures contracts are down about 1 point in the last week. In that time, the SPX is up about 2%. But the move lower in VIX futures contracts is still quite large given that up move in the SPX index. The lack of bid in VIX futures has been evident for the past month. For example, March VIX futures are down 2 points in the last month (from around 22 to around 20), while the SPX has gone from 1410 to 1390.
The real test for whether there is appetite for options into the end of the year will be Monday and Tuesday of next week. At that point, there will still be more than 3 weeks left until regular Friday December expiration, with no holidays in between. Any year end position protection on the part of traders will likely take place next week as a result.
If we see no demand next week, then short premium trades will likely be the favored structures between now and the end of the year. But 2013 will be a different story altogether, as once the calendar turns, most of the “big boy” institutional traders will have to reset their portfolios to 0, and have a much more jittery (options buying) bent as a result.