After record-breaking compression and six consecutive drops in VIX (along with a morning full of further compression) spot VIX is bleeding higher now. Having caught ‘down’ to stocks’ ebullience yesterday, it appears the hedgers are either covered or rolled further out but there is another reason perhaps (aside from the absolute cheapness of protection). Quantitatively, the implied volatility of the S&P 500 is now below its recent realized volatility (this difference is really a better indication of how fearful or fearless investors are) – and on each of the previous three occasions that has occurred in the last year, VIX has risen notably relative to realized in the next few days.
VIX and Stocks recoupled last night…
S&P 500 implied vol is below its short-term realized vol (upper pane – red ovals). This has tended to be a great vol-buying (gamma/vega scalp) opportunity in the past year (lower pane) and perhaps became just too good to be true for the options traders.