The CBOE Volatility Index (CBOE: VIX) is too low. I mean, so many European countries are in dire financial straits, we’re going to have to come up with an acronym way longer than PIIGS – Portugal, Ireland, Italy, Greece, Spain. I mean what if the contagion spreads to France? PIFIGS doesn’t make any sense. Nor does VIX as a teenager. (That is VIX valued in the teens. It closed at 19.94, up .07 Wednesday). This is Serious Crisis mode.
On the other hand, the VIX is too high. We have not seen the surge in the perception of volatility accompanied by a surge in actual volatility. The SPDR S&P 500 ETF (NYSE: SPY) walked straight up from just above 126 to just below 136 over the course of seven trading days, and then dribbled away half of it over the next three sessions.
That puts us within a relatively well-defined trading range that many will no doubt lean against. The 10-day Historic Volatility, the volatility of SPY itself, is about 17, very close to the VIX. What’s more, this is July, the worst cycle of the year for volatility. Throw in some bad unemployment news, and we can say the market absorbed some pretty rotten backdrops without a major price panic.
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On the other other hand, we’re far from past the news cycle. The market is pricing in about a zero probability that we don’t have a last minute agreement on the debt ceiling. What is that’s not true? I would guess that SPY gets plowed. So the VIX is too low.
On the other other other hand, there likely is zero probability they don’t resolve the debt ceiling. So why buy a volatility lottery ticket for something very likely not to happen?
So throw it all together, the volatility market probably has it about right. It’s certainly not “Summer as Usual,” because there are just more ugly catalysts out there than normal. But it is still summer, and we’re really not as volatile as meets the eye.
VIX futures don’t expect volatility to really run away here. August futures – listed on the Chicago Board Options Exchange as VIX/Q1 — closed at $20.00 on Wednesday, less than a dollar premium to the current VIX. That’s decent news for the iPath S&P 500 VIX Short-term Futures ETN (NYSE: VXX) as there’s no big premium to roll out in time but not too exciting for volatility itself.
Follow Adam Warner on Twitter @agwarner.