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Volatility Is Certainly Cheap Now, Right?

|Includes: MSFT, iPath S&P 500 VIX Short-Term Futures ETN (VXX)

Markets finished Monday virtually unchanged but that didn't stop the VIX from plunging to year lows. The VIX, whose price is derived from S&P500 options implied volatility, fell 1.47 points, or roughly 8.5%, on the day finishing at 15.64. Now while the 15.64 level seems extremely low, one needs to keep in mind the historical relationship of the VIX to 21-day realized volatility in the S&P, which currently measures around 10%. The historical spread between the VIX and realized volatility lies somewhere around 4, so the current 5.5 point spread seems to be fair, definitiely not cheap, especially given recent spreads which measured in excess of 10 points.

The lower VIX levels suggest traders have either given up on purchasing protection in near-term S&P options or have gone all the way into selling mode. What's most interesting is the fact that despite this sharp downturn in near-term volatility levels, the spread between near-term and longer term VIX futures remains at historically large levels. Following yesterday's across the termstructure price decline, the spread between front month and 6-month VIX Futures levels stands at 10.05.

Trading yesterday was generally slow with few notable trades passing our scans. We did see investors rolling out protective positions in Microsoft (MSFT) from March to April by purchasing nearly 15k April 32 puts for $0.84. Economic data will be front and center during today's trading session with Retail Sales due out before the open and the FOMC Rate Decision due out around 2:15 pm ET. In our options spotlight we highlight the pros and cons of trading an Iron Condor Options Strategy.

For a daily dose of options trading analysis, strategy reviews, and free trading resources visit us at OptionsBlock.com.