Where does the volatility go?

Where did the volatility go that we had just enjoyed for Oct through February?  As I look at the VIX today with a low close for the year at 12.09 I can’t help but think something is not right.  Trade Deal with China, still not done.  G7 negative interest rate extravaganza is still with us. Corporate earnings are yet to done and are just over the horizon.  The only thing that has settled, or at least been completed since late last year, is the Mueller investigation.  Is that enough for VIX to get below 12?

The volatility futures hold the volatility

While I am keeping politics out of this, the Mueller Investigation is done and it is highly probably, 90% or better by my reckoning, that the current conclusion will stand and nothing will come of it.  VIX does a good job of handicapping known events, but has a hard time with random.  The read on the Mueller Investigation was still an unknown as of last week but that is done now.  As the market knocks out a pin of volatility, VIX drops closer to the current realized volatility where it is humming along at 5.7% on the 10 day.  While VIX DROPS, the volatility futures now hold the risk premium.  VIX  May 22 future is 14.65 and could be in danger of $3 in net premium over  VIX cash by Tuesday.  That premium rarely lasts.

VIX future premium getting massive

VIX Central

Trade the Volatility for what you see, not what you think

We all have opinions on volatility.  Mine for instance is the 10 handle for VIX in a month with current trends.  However it is better to trade for what you see and hedge for what you don’t.  I think the Vol puts are a nice buy in several products even though VIX is low.  With Vol trading we trade the futures and not the cash.  At the low VVIX, call hedging is cheap too.

The Vol Newsletter

If you like my analysis, I run a Volatility Newsletter where we follow every trade, and post new ideas every day, when appropriate.  The VN is 14 wins with one loss this year.  All entries and exits executable in print. We were 26 and 24 last year and flat P/L year because I was greedy on the closes. Sad but true.  Old dogs can learn new tricks and the greed is gone.

Disclosure: SPX, SPY, VIX, VXXB positons

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Follow Mark@optionpit You can hear Mark on Volatility Views every week.

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