Option volatility is cheap
For the first time in a long time there were no market fireworks after the FOMC minutes announcement. The key thing is that the Fed sees less ominous financial conditions as the pain of the 2008 crash starts to recede in everyone’s memory. While there have been many head fakes since May, the possibility of Tapering is looking very real. It is quite possible the new chairwoman will put her stamp on the Fed and start taking away the punchbowl. The ECB meets next week to discuss the lack of inflation so it is possible that they pick up the mantle of QE once Mr. Bernanke rides off into the sunset. That is a big if as Super Mario likes to keep his powder dry.
What is all this doing to volatility? Note the volatility drop below. The near term IV is coming under more pressure than the far term IV. The ATM expiring in 21 days in 10.43 and that is very close to a single digit. Options are cheap and the contango could get steeper.
There might be a reason. Stocks are handling the Taper possibility well. T bonds are lower but stocks are only .5% off of all-time highs. We could see some very low short term volatility leading up to the next FOMC meeting. What should work is selling some short term options and buying longer term options. The idea is a variation on the long time spread in any of the big indexes like SPX or RUT. The next round of fiscal bickering will be here sooner than we think and the IV out there should keep up. Short term the silence might be deafening.
OptionVision™ – data from ORATS
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