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Are We Dealing With Market Complacency?


Yes, and prepare for a pullback.

Editor's Note: This article was written by Ryan Renicker of Newedge. Renicker has more than 10 years experience at top-tier brokerage firms generating options and derivative trade ideas for institutional clients. Renicker has been a member of three top-ranked options and equity derivatives strategy teams at three separate firms within the past 10 years.

SPY one-month implied volatility and SPY one-month realized volatility have come together, each at roughly 21.16%.

SPY One-Month Implied vs. One-Month Realized Volatility

Perhaps one key conclusion I draw from this is that market complacency has finally set in! Of course, this is simply my opinion.

Some key factors supporting my conclusion:

1. Implied volatility has basically traded sideways since mid-September.

2. Realized volatility has been steadily increasing since mid-September.

3. Current implied volatility is roughly in line with what it was in mid- to late-September, during which time SPY realized volatility was hovering in the low teens.

I guess all three of these factors are in fact one single factor; no pun intended, but they "come together" so to speak.

This dramatic reversal in SPY implied volatility -- combined with the steadily increasing trend in SPY realized volatility -- combined with some key market catalysts heading into year-end (holiday sales, November payrolls in early December, and some others) lead me to believe that the market is indeed very complacent right now and set for a pullback.

I don't anticipate the SPY to trade higher than my year-end target on 110.38.

Also, to all the fixed-income traders out there, enjoy the Parade on Fifth Avenue.

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No positions in stocks mentioned.

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