Most of our recent trade strategies have been long volatility structures. Whether that’s long outright calls or puts, long call spreads or put spreads, or long calendars, our trade structure selection is much different than it was in the spring. A major reason for that shift is that the underlying volatility regime for the broader market seems to have shifted.
What do I mean? Here is some evidence that illustrates my point:
1) Realized volatility is higher - The 10 day and 30 day historical volatility measures in the SPX are simple measures of how much the market is moving each day (and generally a good indicator of how much single stocks are moving as well). The best predictor of the immediate future’s volatility is the volatility experienced in the immediate past. Here is the chart since the start of 2012, which has generally been a low volatility regime:
The 10 day (black) and 30 day (orange) are at the highest level since last June. Granted, one could argue that if the correction’s over, markets should calm down. But 2 other measures are showing continued high readings that suggest to me that higher volatility is more likely to continue.
2) NYSE TICK Readings’ Range Has Increased - The NYSE TICK shows the number of stocks that tick up or down at the same time on the NYSE. Generally, extreme readings are a signs of more volatile markets, as stocks are all moving together at once, and correlations move higher. In the past 10 days, we have seen extreme readings at their highest level in a year:
Next week is crucial in this regard. Though it’s a holiday week, there is an abundance of economic data, with the most focus obviously on the Payrolls report on Friday (with the Fed’s tapering comments lurking in the background).
3) Implied Volatility for Global Assets Above Average - My weekly Vol Around the World Post highlights implied volatility levels for global assets. This week’s readings show that all major asset classes and geographies except crude oil have implied volatility priced above their 52 week averages:
Given the global nature of the implied volatility increase (in contrast to the Fiscal Cliff movements of last fall), it is more likely to remain volatile across markets for some time.
As long as these indicators continue to flash high volatility conditions, we will focus on option strategies that benefit from increased volatility. For now, with the VIX around 17, we still view implied volatility priced as relatively cheap compared to overall market movements. CC highlighted one structure we were eyeing in the VIX yesterday. Our bias remains in that direction until the evidence indicates otherwise.