Condor Options

Volatility Tracker for June 22, 2009

Last week was the first time since the inception of this weekly letter that all of the components tracked declined in terms of both price and implied volatility.  This is not a remarkable fact given the seasonal tendencies in play, and many traders will likely expect the quiet to continue over the summer. However, I’m changing my short-term bias for S&P 500  implied volatility to positive based on the strength of the VIX Premium Ratio.[8] For the ratio to moderate, either three-month estimates (VXV) would need to fall or one-month estimates (VIX) would need to rise, and when the ratio is at an extreme level, it’s almost always the three-month estimate that wins out. Note that a call for reversion to the higher longer-term mean need not supervene on a significant decline in prices, although the two obviously do often correspond.

Last week, I indicated a preference for selling options on gold and oil in order to express any directional theses, and that stance has worked well so far, although in gold I would want to maintain some long vega exposure in longer-dated options: the headline 12% decline this week in GVZ (the “Gold VIX”) probably deserves less attention than the turnaround in realized volatility.[11] The ratio of lagged implied to current realized volatility seems particularly noisy, so I don’t regard the movement there as meaningful yet.[12]

I have added daily return histograms for each section. They may prove helpful over time at identifying changes in the skewness and/or kurtotic shape of returns. [9,13,17]

Short-term S&P 500 Implied Volatility Bias: Positive