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Volatility Decline More Truth Than Illusion


Parity between cash VIX and VIX futures tells us something is afoot.

Remember back when 30 seemed old? How about when 30 seemed high for the VIX?

Well, how does a 30 VIX feel now? It's almost like they're giving options away. You forget that, historically, it's still a bit over average. But here we are.

As noted last week, this promised to be an ugly stretch for options - 5-week cycles tend to see heavy volatility to start. Throw in a strong market and a holiday weekend, and there's truly no demand to own anything.

I'd normally make the case that this is a bit of a calendar quirk. That happens when traders fast-forward their valuation models to a date slightly in the future. In other words, even though the calendar says Tuesday, they tell their machines to pretend it's Friday or Saturday or Monday. It lowers their bids and gives them the illusion that volatility has declined - in truth, effective time is what declines.

But that's not what's happening here. If it were, you'd see the cash VIX at a decent discount to VIX futures. But the difference between cash and June is only about a point. Which tells me this volatility decline is more real than illusion.

So does that mean options are a buy here? Not quite - I'd rather miss the bottom tick in volatility and chase it, rather than trying to catch it. Remember, when you buy actual options (not VIX options), the volatility you pay is only relevant compared to the volatility the underlying ultimately realizes between now and when the option expires.
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