That is the question, Do you want to sell 9% volatility? If you are an SPX trader, the answer is usually no. LTCM famously sold 11-13% volatility in the SPX in 1998 right before the Russian Debt Crisis went belly up. SPX volatility shot to the 30% range and LTCM went to history’s dust bin of once successful funds. The question now if one is a premium seller where does one sell volatility?
VIX volatility at 12% is ATM volatility at 9%
That is the problem with VIX at 12%. The only way for it to go lower is implied volatility at the money has to drift below 9% to the 8% range. That equates to the magic number of .5% per day of movement in the SPX. That is hard to do when SPX rallies almost 1% a day. The strong rallies essentially “drag” at the money volatility with it keeping the current level of VIX. The hard rally today did not crush VIX because IV is already too low for the move.
ATM Implied Volatility is low but skew tends to increase
The lower the at the money volatility the steeper the downside put skew gets. Think of this as volaltility inflecting off of the ATM so the volatility curve rises as SPX rises. That makes option we buy near the money cheap and option sold OTM relatively expensive. Downside put flies provide more bang for the buck as a short delta, put spreads too. Where this does not work very well is selling upside call spreads. The lower IV just makes the spreads too cheap. This is why Iron Condors are a pain in the you know what into any index rally. The call spreads are just too cheap. That cheap is happening now. I would rather buy junk upside calls at low volatility and hedge with some cheap put butterflies. Let the bull rage!
Disclosure: SPX, VIX positions
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