The VIX dropped to a 2 month low yesterday. The 6 year low seen in mid-March (11.05) is only a bit more than a point away. This low volatility environment has been reflected in both overnight and intraday price action, as the market’s price range has become much tighter in the past week.
A chart of 30 day implied volatility (red) vs. 10 day realized volatility (white) in the SPY illustrates the rapid move lower in volatility pricing:
In this context, the options market is collectively signaling that it doesn’t expect much of a move no matter the news. The FOMC release next week, on July 31st, would normally be a high profile date on the calendar. But the August 2nd expiry weekly straddle in SPY, which captures that event, is currently priced at about $2.60. In other words, the options market is pricing in a 1.5% move in the S&P 500 index between now and next Friday, including the FOMC release.
This is summer doldrums, though. Maybe market volatility will pick up in the fall. Yet, the implied volatility for the autumn months is not much higher. Sept 21st expiry options capture the September FOMC release, at which some market participants expect the Fed to announce the start of tapering. In that sense, the release is holds more importance than usual. However, even the Sept 21st straddle is only a 12 implied vol, so the straddle is priced at around $7.00. That might seem hefty in premium terms, but only implies a +/-4% move over the next 2 months, tapering or not.
So earnings or no earnings, Fed or no Fed, Chinese tightening or no Chinese tightening, the options market is saying that volatility is gone for a while. The options market could be wrong, but expecting big moves here is lower probability than normal. One early sign to watch for a potential shift is overall market volume. It is near the year’s lows over the past week. If and when it starts to increase, volatility generally follows.