Two month implied volatility momentum, one month realized volatility of implied volatility, and implied vol skew are all high, and the latter two are well beyond their top quartile bounds. Risk perceptions haven't filtered into nominal IV readings yet, as both the CBOE Volatility Index (VIX) and one-year SPDR S&P 500 ETF (SPY) implied vol are below one year median values. Those readings should rise this week, though, with a government shutdown possible and Sunday night S&P 500 futures down eleven points.
What these risk readings tell us is that it is still a favorable time to get long volatility. Equity index options are not cheap (15% one month implied vol vs. trailing SPX realized vol of 9.4%), but if you expect more market turmoil in the weeks ahead, SPX puts and VIX calls are attractive. Note that VIX options were priced above 90% implied vol at the beginning of September, and the CBOE VIX Volatility Index (VVIX) index closed below 75 on Friday. October VIX options expire before the state Treasury debt limit date, and then there is the unknown range within which the Treasury would run out of cash, so I think the best approach will be to trade November contracts.
I want to watch the market action early this week and see what happens with the shutdown story, and then we will price a debt ceiling VIX hedge.
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