Much like scheduling an annual health checkup for your birthday or changing the batteries in the fire extinguishers each leap day, investors should review volatility markets each month at expiration.
The first observation is clearly that on an absolute basis volatility both realized and implied is at or near post financial crisis lows and near all-time historic lows. Realized 20-day volatility for the S&P 500 (SPX) Index for the 20-days ending February 12, 2013 was 7.73% up from the 5.40% recorded on January 31, 2013 (historically a seasonal low point), a low extending back to September 21, 1995.
The settlement value for the CBOE Volatility Index® (VIX®) February future of $13.01 was the lowest recorded since February 2007’s settlement value of $9.95.
Likewise the CBOE NASDAQ-100 Volatility Index (VXN) February settlement value of $14.36 was the lowest since its relaunch in July 2012 and was below the values recorded during its 2007-2009 tenure. The CBOE Brazil ETF (VXEW), Emerging Markets ETF (VXEM) and Oil ETF (OV) Volatility Security Futures also all recorded record low settlement values since their launches.
The CBOE Gold ETF Volatility Security future (GV) however, recorded on the 3rd lowest settlement value on record above both January’s $13.83 and November 2012’s $12.96.
If we look at the several volatility futures’ settlement values versus the VIX settlement, spreads on balance have been declining with exception of gold implied volatility.
So what do we make of this low volatility environment. Having recently presented at II’s Alpha East conference and attended a volatility symposium hosted by Bloomberg LP, there is a general belief that the actions of the past several years by world governments have both socialized risk and the actions of the central banks have inserted a liquidity put that has potentially removed left-tail events from the potential distribution of future returns (the standard deviation of which is implied volatility) if not removed whole parts from the left side of the distribution. At the extreme there is talk of inflation creating the possibility of right-tail events.
For the moment we probably remain on the same “tack.” But while the winds may remain calm, they may shift with little warning.
In the two years that I have published the Differential Research blog, several things have changed. First, to the content of the blog, many people now have daily performance of volatility instruments readily available, as such a daily recap of the volatility markets has lost some of its value. Likewise, blog publishing and e-mail distribution has grown to the point of becoming overwhelming. The obvious answer is to publish more less often. In terms of more, I will be looking at more volatility markets including the full array of CBOE Volatility and Volatility Security Indexes. I will also be expanding the analysis of volatility markets to include information implied by the volatility market about its underlying asset. The combination of more less often will hopefully be a more value-add for readers in the future.
data sources: CFE, Trade-Alert LLC, Yahoo Finance and Differential Research LLC
The risk of loss in trading commodity futures and options is substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.