Monday Equity Volatility Report

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

Click to enlarge:

1. Comment. Highlights items of note in the data below along with our short-term volatility bias and any trading theses. The Expected Daily Move table displays the de-annualized price and percentage change in each underlying asset as implied by its volatility index, within one standard deviation.
2. Weekly Change.Tracks the weekly percentage change in the assets listed and in their implied volatility indexes.
3. Implied Volatility Indexes.A one year chart of the implied volatility indexes for the S&P 500, gold, oil, and USD/EUR. Indexes for the Nasdaq 100 and Russell 2000 are omitted because of their tight correlation with VIX.
4. S&P 500 Price and Bollinger Bands.Tracks daily closing prices in SPXwith an overlay of one and two standard deviation 50-day bands.
5. S&P 500 Implied and Realized Volatility. Tracks the 21-, 60-, and 90-day realized (or “historical”) volatility of the index and the21-day lagged CBOE Implied Volatility Index ("VIX"). Realized volatility is displayed as the annualized standard deviation of lognormal returns over the period specified, and may be thought of as a backward-looking measurement of price behavior. Implied volatility is the annualized standard deviation of returns implied by option prices, and may be thought of as a forward-looking measurement of expected price behavior.
6. S&P 500 Implied/Realized Volatility Ratio.Tracks the ratio of 21-day lagged implied volatility (IV) to 21-day realized volatility (RV). This ratio asks how well IV from one month ago predicted the RV over the next 21 trading days (roughly, 30 calendar days). When IV correctlyanticipates RV over the period, the ratio will hover near 1; we regard the area near 0.9 –1.2 as normal, given the persistence of a volatility risk premium in equity market derivatives. A ratio less (greater) than 1 indicates that the price behavior of the underlying asset was more (less) volatile than anticipated.
7. Volatility Futures Term Structure.Tracks the Friday closing prices of the Volatility Futures complex (VIX, VXD, RVX) for the two weeks prior, along with the spot levels for reference.
8. VIX Premium Ratio.Tracks the ratio of rolling three-month (VXV) to one-month (VIX) implied volatility. Periods in which one-month readings persist at an extreme premium or discount to three-month levels have tended to coincide with major market moves.
9. Gold Price and Bollinger Bands.Tracks daily closing prices in GLD with an overlay of one and two standard deviation 50-day bands.
10. Gold Implied and Realized Volatility. Tracks the 21-, 60-, and 90-day realized (or “historical”) volatility of the ETFand the 21-day lagged CBOE Gold Volatility Index ("GVZ").
11. Gold Implied/Realized Volatility Ratio. See #6 above; given the novelty of the VIX-style gold volatility index (GVZ) and the characteristics of the underlying, we do not yet have a range we regard as normal.
12-14. Oil charts correspond to 9-11 above.

Disclosure: Short SPY, Short IWM

Comments

[Douglas T:]

Charting - Charting: It's one thing to show readers what has occured in the past up to the present (today). What would really be interesting is to see charts that reflect high probabilities of short term (1-3 month) volatility - S&P 500 and gold/oil prices. With that kind of information an average investor could make some rational investment decisions. www.mutualfundwealth.com/

Jun 16 11:56 AM

[Condor Options:]

The implied volatility indexes covered here already serve precisely the function you describe. They state an annualized 30-day implied volatility (forward-looking) for the asset in question, within one standard deviation.

VXV, one of the components in my VIX Premium Ratio, tracks a similar three month estimate for the S&P 500.

Jun 16 05:09 PM