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Volatility Partying Like It's 2002


What's interesting is that looking forward 90 days, traders are as fearful now as they have been at any time all year.

Normally we look at volatility in 30 day measures. The VIX is an estimate of implied volatility of an SPX option with 30 days duration, for example. Historical volatility, the volatility of the stock/index itself, is mostly calculated as a 30 day estimate, though I would note it's different from the implied in that it looks back in time.

But as I often note, 30 day volatility is subject to lots of noise. What of right now in the middle of a slow week? Between Thursday's holiday, Friday's sparsely traded session, and today's likely slow action, an option with 30 days to go (coincidentally the exact length of a December option) effectively only has about 26 days of trading life. Call it 27 as there is some weekend and holiday gap risk priced in.

The disparity between 'subjective' time (my calender fudging) versus 'objective' time (the 30 days until expiration) causes some quirks in volatility calculations. Specifically, it makes the VIX and friends print lower than they would be on a garden variety Wednesday 30 days in front of expiration.

A longer-dated volatility measure would offset some of these quirks. So here is a chart of 90-day volatility for the SPY. And as you can see, it is right near 52 week highs, unlike the VIX, which is considerably below the August pop levels.

Now this measure is not perfect either. Volatility is always a variable, so any option is a guess on the volatility of the instrument between now and when the options expires. So if you think 30 days out is a guess, imagine trying to estimate 90 days out?

But you can also say that "guess" is a consistent bet. In other words, this chart lets us see where that 90 day guess was at all times, so it is a fear indicator, just like all the others.

And what's interesting is that looking forward 90 days, traders are as fearful now as they have been at any time all year. All of the last five years in fact. Converting to SPX options, this particular measure has not been this high since 2002.
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