Option Volatility Fatigue sets into the SPX

Option Volatility Fatigue is a lack of movement but big option prices

The SPX rallied a bit today and it was enough to drive the VIX down to 16.23.  The close to close volatility was just a .50% SPX or around 8% realized vol.  Why are we pricing a 16% VIX when realized is only around 8%.  We will get into the why but in the short term market the gets “volatility fatigue.”  This is when implied volatility (IV)  is priced higher but underlying movement is very limited.

Volatility Fatigue is better for some trades than others

Part of the current problem is breaking away from 3000 SPX.  This last TWEET Storm only produce SPX 2950 instead of a real selloff to 2900 or lower.  Between Impeachment Politics and Trade War redux we only got a 1% move and that was not sustained today.  No follow through so short term realized volatility stays low but the hint of a problem keeps 30 day volatility higher.  The hardest thing about this market is theta negative trades in the indexes or volatility products.  Long gamma is just not paying unless the trader is leaning right after or into the news shock.  Butterflies or long theta position positions can work much better.

SPX realized volatility in single digits

Setting up Flies to bounce of 3000

I thought the volatility fatigue would translate to lower VIX cash prices this week.  While the downtick in VIX is there TODAY we still are nowhere near the 14 or 13 handle for VIX.  I think we can go lower but the payout with VXX or VIX puts will be slower possibly not until Oct expiration.  Not great for my current positions.  SPX Put butterflies that aim down and ricochet off of 3000 will do better faster.  You can check how to set up a fly like that on my video last week using Edge hunter.

Using Nets to Catch Butterflies from Option Pit and Cboe LIVEVOL

Disclosure: SPX, VXX, VIX positions

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