Source: Condor Options
Box plots in the chart above mark, in order, the minimum, first quartile, median, third quartile, and maximum values for each risk indicator, with the current value shown as a red cross. Indicators are, in descending order, the CBOE Volatility Index (VIX); SPY one year at the money implied volatility; S&P 500 two month IV momentum, measured as the difference between exponentially-weighted 15- and 30-day moving averages of ATM IV; S&P 500 one month volatility of volatility, measured as the two-week standard deviation of daily log changes in 1M IV; SPX SKEW index, provided by the CBOE; and iPath S&P 500 VIX Short Term Futures (VXX) three month rolling beta with SPX as the benchmark.
Implied volatility momentum and the volatility of one month implied vol are both above their two year median values. In the past, this is the sort of situation in which it has been better to stay away than to jump in, even though option premium looks expensive. The fact that one year implied volatility is only just above the first quartile is a positive sign, although with a bit more selling this week we could see that measure start to rise as well.
In early August, I posted an important chart showing where the cheapest hedges were. iShares MSCI EAFE Index Fund (EFA) was down on Tuesday more than the S&P 500, and iShares MSCI Brazil Index (EWZ), which we traded as good contrarian vol short, was only down 1.25% and is acting much better than developed market indexes.
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