It's Time to Buy Volatility
For the first time in over four months, options, or implied volatility, is inexpensive and represents a buying opportunity.
The VIX futures and its term structure also flattened out with front October now trading 15 or just 7% premium, and the November futures are now trading 17.50 or 25% premium to the front month. December futures are down to 22 or a 28% premium to October, which is down from the 60% premium. This convergence of prices and squeezing of some of the excessive premiums suggests options are now relatively inexpensive.
Problems Still Loom
While we have passed through several key events, many of the larger macro issues that inflated IV during August remain in place and could potentially come back to haunt the market in coming weeks and months. We are facing the fiscal cliff, the uncertainty of the US election, the lack of any real resolution or solution for the eurozone, geo-political unrest on the rise, and the beginning of earning seasons, which ticks up volatility even in the best of circumstances.
And as long as we are talking about reversion to the means statistics, note that neither the Dow Jones Industrial Average (INDEXDJX:.DJI) nor the S&P 500 had suffered a decline of 1% or more in over 63 trading sessions. This is the longest period in over six years. On Tuesday we finally got that 1% decline in the S&P and the VIX popped 11% to the 15.7% level.
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