Schaeffer's Trading Floor Blog

Fear Not About the Lack of Fear

Why the current low-volatility backdrop is nothing to worry about

by 6/30/2014 7:58 AM
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Another week, another snoozer as far as volatility goes.

The SPDR S&P 500 ETF Trust (SPY) closed at $195.94 on June 20, and managed to drop all the way to $195.82 at last Friday's close. That probably overstates the volatility, though. The lowest SPY close last week was $194.70, and the highest was $195.88, a range of a whopping 0.6%. We've seen non-volatile price action all year, but this is getting ridiculous.

The SPY hit a high tick of $196.50, and a low of $194.13, so on a total range basis, we covered 1.2% of ground. And then we ended up right where we started. Not the stuff that volatility dreams are made of.

It all translates to a 10-day realized volatility of 5.9. That's a pathetic number, but it's up a tad from readings near 4 earlier in the month.

Despite all this, the CBOE Volatility Index (VIX) lifted on the week! It rallied 0.41 point all the way to 11.26! We have to put that all in context, of course. At 10.85, it's just not going much lower, no matter how inactive we get. It's technically overpriced versus backwards-looking realized volatility, but again, tough to see it do anything but meander with this overall backdrop.

But fear not about the lack of Fear. VIX actually is up more in percentage terms in the calendar month of July than it is in any other month, historically.

So, we have that going for us, which is nice. But, it's probably more of a statement about the weakness of options heading into the summer than the prospects for any particularly impressive action going forward. The two weeks heading into July 4 are often the slowest two weeks of the year. A lot of that outperformance is thanks to options simply normalizing after the holiday respite.

You can see the flip side of this effect in November. Coming off the heels of some nutty Octobers, we often see options normalize going the other direction in November. Not to mention that the slow Thanksgiving week is at the end of the month. It's highly likely we see an absolutely pathetic week going forward, but it probably gets better by mid-July.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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