Stocks quoted in this article:
As Green Day once (sort of) sang when ruing their late-summer options decay, "Wake me up when September starts."
The market had a great week last week. The Nasdaq Composite (COMP) hit 14-year highs, and the S&P 500 (SPX) hit all-time highs, though it never quite hit that magical 2,000 mark. I'm fairly certain no product in history has ever topped with a "99" full of some sort, so, I'm guessing we nudge there (that's a big call there).
And great markets, of course, beget a lousy CBOE Volatility Index (VIX). It's back down to near 11.50, and theoretically that's high vs. realized volatility (RV). The 10-day RV in the SPX is down to 5.3 -- the lowest reading since early June. That means VIX has a premium of greater than 6, or greater than 200%, if you prefer.
I got asked the other day why I use the 10-day RV number, presumably as opposed to the 20-day. It's clearly "noisier," given it only incorporates half the data. That makes it prone to misleading ticks here and there, as one big outlier range day can keep it pumped up for a couple weeks.
I tend to use it because I feel it gives a better picture of the volatility that traders feel on the ground, and that, in turn, influences options pricing.
I'm not religious about it, though. If you look at the 20-day and find it serves your needs better, that's absolutely fine, too. I do believe that going too long-dated on RV isn't great. It will give you a longer-term picture of realized volatility, but so will looking at 10-day or 20-day RV over a longer period of time. But again, that's more personal preference than anything else.
One concept to keep in mind, though, is that you don't have to match up the duration of RV and implied volatility (IV) to make a comparison. That's mainly because they're different to begin with. IV prices forward and is measured in calendar days. RV looks backwards and is measured in trading days.
That's all a long-winded way of saying realized volatility has drifted quite a bit lately. And, it's not terribly likely it picks up in any major way this week, and it's even less likely that VIX does much. It's the dreaded pre-holiday week into the long weekend. It's time to both get in those last few barbecues and push those options volatility models ahead eight days to Sept. 2. Options with 30 calendar days to go may feel like they only have 25 or so days left, and will price accordingly. The fact that the market itself likely won't do much isn't helpful.
VIX futures and iPath S&P 500 VIX Short-Term Futures ETN (VXX) sometimes give us better pictures of volatility expectations on holiday weeks, so we'll pay some attention there over the next few days. For now, VXX hasn't hit an all-time low since July 3, so hey, that's progress! Of course it's only 0.75 away, so the Era of Good VXX Feeling may end soon.
Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.