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Fading Volatility

Despite the fact that the S&P 500 ended the day on a weak note, the VIX continues to relax as the current circumstances are digested.  On Tuesday, May 25th, the S&P 500 hit its low of 1040.78 which was very close to the low of 1044.50 on February 5th.  Despite making new lows, the VIX was unable to hit its high of 48.2 which was established on Friday, May 21st.

VIX establishing a downward trend

In addition, the VIX futures curve has been relaxing consistently since Friday all across the curve.

Forward levels of volatility have been subsiding

As we experienced during the March lows in 2009, we can witness equities making lows while the VIX falls off from its highs.  Remember that the VIX and longer-term implied volatilities generally represent demand for options, specifically put options when implied volatility is spiking.  As the level of equities decline and get closer to what many believe is a “fair value” then investors become less willing to purchase protection against their long investments.  Unless we believe that equities could make a run for their 2009 lows, then the 48% peak on the VIX should prove as a high for implied volatility.

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Continuing the Discussion

  1. Sizzlin Stocks » Blog Archive » Long-Dated Volatility Opportunities linked to this post on June 17, 2010

    […] often talk about the short-term measure VIX as an indicator of when to short volatility, or looking at an even better indicator through option skew. We tend to focus on short-term implied […]

  2. Long-Dated Volatility Opportunities | Smart Stocks Investing linked to this post on June 17, 2010

    […] often talk about the short-term measure VIX as an indicator of when to short volatility, or looking at an even better indicator through option skew. We tend to focus on short-term implied […]



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