The Calm before a VIX Pop: Options and Volatility Strategies

The Calm before a VIX Pop: Options and Volatility Strategies

Summary:Markets are near highs and volatility is near lows, historical data shows that a low VIX can be taken advantage of for short term trades.Seasonality of VIX closing prices vs. mean and median levels since 1990.Macro reasons to consider trading protection.Volatility is near multi-year lows as the major indices have been trading just under all-time highs. In February, the Dow Jones Industrial Average crossed above 20,000, the S&P 500 traded above 2,300 and the VIX temporarily broke below 10.This is all occurring at the same time macroeconomic uncertainty is quantifiably at an all-time high, the Fed and other global central banks are unwinding the biggest monetary intervention ever, waves of populism are electing new political administrations, and aggressive stock valuations are the norm.For context, the below charts quantify and depict a number of the above topics. Starting off with equity returns and current volatility levels.Low Implied VolatilityThe SPY (SPDR S&P 500 ETF Trust) is up 60% cumulatively over the last 10 years. As such, volatility derived from its options is near all-time lows. Other major products like the Russell 2000, Dow Jones Industrial Average, and NASDAQ 100 (as measured by the IWM, DIA and QQQ respectively) are also at relative lows implied volatility wise. Depicted below from Interactive Brokers (IB). (https://www.interactivebrokers.com/en/index.php?f=14099#tws-software)The VIX (Implied Volatility on S&P 500 30-Day Options) is another measure of volatility and complacency. As depicted below from IB, the CBOE’s VIX is hovering at 10-year lows. But what happens when the market inevitability has a hiccup? In the next chart, we explore what happens to the volatility of options on the SPY.Across the term structure (each...