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Volatility's Complacency Is Not a Contrary Signal


It doesn't tell you anything you can't infer by observing all market pullbacks.

Remember that volatility that overpriced reality all summer? It's pretty much gone, like the warm weather.

In this particular snapshot, we see SPY 30-Day IV (implied volatility) hovering at roughly 21, while the 10-Day HV (historical volatility) sits at about 16. A lynx-eyed observer would note that 21 is still greater than 16, and according to my abacus, that observer would be correct. But I'd note that HV over short duration is a noisy measure, and a still IV over HV premium is normal. According to Larry McMillan, four points specifically is the norm, and that's just about where we sit.

As I noted yesterday, the only oddity I find about this is the timing. It's October. It's earnings season! We have expiration on Friday and a five-week cycle up next, and normally we'd expect volatility to hang in this week and then get plowed next week. It still might decline, but we're starting at 52-week lows.

Again though, just to reiterate, "complacency" right now is a confirming signal, not a contrary one. If I want to look for options to give me a market call, I want them to tell me something I don't know by simply watching the market. A sudden spike in fear on the very onset of a turndown, like we saw a couple weeks ago, is a good contra tell. Complacency amidst a never-ending slow-motion rally doesn't tell me something I can't infer by just noticing that all market pullbacks are brief and shallow.
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