Daily Options Report

We narrowly averted history yesterday. This, from Bill Luby.

After falling for a record-tying ten consecutive days, the VIX narrowly missed setting a new record today (yesterday) when it jumped 0.37 in the 4:00 - 4:15 p.m. ET twilight zone trading period to finish the day at 21.49, +0.06.

In the chart below, which I borrowed from the subscriber newsletter, I offer some data to help put the current decline in an appropriate historical context. Prior to the streak that ended last Friday, the only other time that the VIX fell for ten consecutive days was in April to May of 2005. At that time, the bull market was just beginning to pause for a month and it was not until six months later that bulls began to reassert themselves.

Looking at the other fifteen instances in which the VIX fell at least seven days in a row, a pattern emerges in which following the VIX streak, the S&P 500 index has a tendency to post a slight loss for a week or so, then significantly outperform the historical averages (“census”) for the balance of the periods studied, from 10 to 100 trading days.

Bill's interpretation is we're in a brief recalibration of risk phase, and set to move higher again after a brief pause.

Basically, the drop in volatility has gone in a stairstep fashion. The market gets comfortable at a VIX level and sits for a couple cycles before hitting new lows. At all times, it overbid actual risk.

Clearly that overbid dimishes as the VIX drops in absolute terms. In other words, there's not much further to go, this may be the last step for all we know.

Anytime I tweet about a low VIX, someone on twitter asks if I'm a buyer of VIX-whatevers. I don't trade VXX or VIX anything, but doesn't mean I dont have an opinion on it. And my answer will always be no, I don't see any reason to try to bottom fish. If I wanted to get bullish volatility somehow (and I'm sure I will at some point) I would rather miss the bottom and buy higher on an uptrend. Time is money as far as options are concerned, and short of buying VXX and somehow timing the bottom correctly, it pays to wait and not pay decay. Which will be a likely loser so long as realized volatility remains dormant.