Condor Options

Volatility Tracker for June 15, 2009

This week’s report is a little late, but after the close Monday I see little reason to change any of the comments below. The Dow Jones Industrials closed down 187 points, but that’s not so remarkable when you consider that, on Friday, the Dow volatility index (VXD) implied a standard deviation of daily moves of 140 points.

If last week marked a slight stirring in the factors that would portend a turn in the market, this week is more of a return to indecision. Points in favor of a continuing decline in realized and/or implied volatility: it keeps declining [2,5]; volatility futures term structures keep declining [7]; the VIX premium ratio is also moderating [8]. Points in favor of a turn: equity options have been relatively expensive to own over the past month [6]; volatility futures remain higher than their spot levels, and continue to price in future increases [7].

I’ve added three more charts this week, extending the same analysis of price, implied volatility, and realized volatility to oil that has been available for gold and equities. Gold options continue trading at a premium relative to recent historical volatility [10,11]; bullish traders may want to express that view by selling put vertical or diagonal spreads. Options on oil have also been expensive over the past month [14], and with OVX bucking the trend of its peers somewhat [3], my bias is toward selling, rather than owning, options on oil.

Short-term S&P 500 Volatility Bias: Neutral