MorningWord 04/30/15: You Are Here $SPX, $SPY

by Dan April 30, 2015 9:31 am • Commentary

You know where the S&P 500 (SPX) is. Within 1% of its all time high, and up more than 200% from its 2009 low:

SPX 8 yr chart from Bloomberg
SPX 7 yr chart from Bloomberg

Its been a fabulous ride. And in hindsight it’s been devoid of risk since the start of 2013, with the largest peak to trough draw-down in the last few years a mere 10% coming last October.

Right now, ten day realized volatility in the SPX is 7, implying less than a 1% move each day, approaching levels that we have usually seen volatility spikes from:

SPX 10 day realized vol from Bloomberg
SPX 10 day realized vol from Bloomberg

This lack of movement has had the obvious effect on index options prices, with 30 day at the money implied vol approaching the lows for 2015, and more than cut in half from the highs last October:

SPX 1yr chart of 30 day at the money implied vol from Bloomberg
SPX 1yr chart of 30 day at the money implied vol from Bloomberg

A great example of why index options prices remain cheap despite what seems to be a pick up in commodity and currency volatility is the SPX’s 80 basis point range yesterday, a day that the FOMC released a rate statement, and the index closed right in the middle of the range down only 37 bps.  The irony is that the Fed’s QE was the single largest dampener of volatility over the last year, and with QE done and the constant debate of the timing of the end of ZIRP, investors demonstrate little worry for the potential of downward volatility.

So looking out a month, using the SPY at about $210 as a proxy for the SPX at 2100, the May 29th 210 straddle (the call and the put premium) is offered at about $5.75.  If you were to buy that you would be playing for a move of only about 2.5% in either direction. That’s an amazingly small range that only allows for a slight dip below the 50 day moving average on the downside and a peek above the recent highs on the upside.

It’s possible that the options market is correct and we’ll see some consolidation around 2100 in the SPX, and that could be despite some up and down movements from day to day that seem to threaten that tight range. And maybe the market is already going into Summer mode early. But with a possible rate decision from the Fed in June and the volatility we’ve seen in commodities, bonds and currencies, it seems like equity volatility is still backward looking, not forward.