It was a rather ugly day in the cash markets with the S&P 500 down 1.59%, but volatility remained rather subdued. We saw a nice move in the VIX of 1.54 vol points, but in the VIX futures curve action was very muted in longer maturities with most increasing about .4 vol points.
We could argue that the longer dated VIX futures are already fairly inflated at the 30 vol level, but what about implied volatility of regular S&P 500 options? It turns out that the skew on 6-month options moved in a timid way as well with ATM implied vol moving from about 22 to 22.5. In addition, we saw a pretty parallel shift in vol which suggests that there was little “fear buying” of OTM put options. In fact, I would even suggest that the fall in market prices gave traders an opportunity to sell puts or increase risky asset exposures at more attractive levels.
I take this to mean that the “risk-on” trade is still fully in force and we should see this as a pause and pullback rather than the start of a correction. The mood could shift quickly with more news, but right now the vol markets are not telling me to run for the door. In fact, they might just be telling me to add to my positions. Do you see any fear in the Credit Suisse Fear Barometer?