And Then, Malaise Set In

So just to consolidate some VIX-y points.

Realized volatility in the market continues to abate, though not as much as meets the eye as a 3-4% range is still a 3-4% range, be it up or down. The intraday swings are less violent however, and provide way less flipping opportunity. So it makes perfect sense for options volatility to contract.

The catch though is that options did not expect the insane volatility of a few weeks ago to persist. Options volatility severely lagged realized volatility throughout the move. And VIX near month futures traded with 20-30 point discounts to the actual VIX.

So this blip down in volatility this week is above and beyond the initial assumption that volatility would soon cave. And that’s what I find interesting.

Now the VIX and VIX Nov. futures are close to parity as I type, so that has changed. But relationship between implied volatility (predictive in nature) and historical volatility (lagging) is as before, with a severe options discount. Which as Bill showed the other day, is somewhat bearish.

So while it’s hard to call mid 40’s VIX “complacent”, as it was not so long ago that was a 2008 high, it is essentially telling us that Fear is over. Volatility is best viewed subjectively imho, and this move is a little too much too fast as I see it. I’m leaning modestly bearish.