Eye On Volatility: What's Your Duration?

The VIX’ trajectory may have turned, but volatility is still sky high…

As we commented on Nov. 4th, equity volatility appears to be showing signals that it is finally receding. Although it’s still too early to call, we have some data points to support this thesis:

• Despite several sharp intra-day spikes that brought it close, The VIX has still not clawed its way back to close over 67 since October 28th.
• Since October 27th the VIX has closed below the realized 30 day volatility of the S&P 500 in every session. Remember that the VIX measures volatility implied by front month options, as such it indicates anticipated near term volatility.
• VIX futures maturing in December and January hover still lower -near the 50 day moving average, indicating the boys in Chicago expect that equity volatility will start coming back closer to historical norms over the coming months.
• Keith tracks the VIX in the same manner as he tracks cash indices and his models suggest that it runs out of bullish “Trade” momentum around the 70.94 level
Even if implied volatility levels are starting to decline however, they are still at historical high levels and provide both significant risks and opportunities.

Traders on the opposite tails of the investment spectrum (arbitrageurs and market-timing thrill seekers) will be looking to play this anticipated mean reversion in their own way. Those guys know what they are doing (or think they do), so I won’t waste any time on what strategies they may implement.

What I do want to underscore however, is that there are some very attractive opportunities for long/short and long only equity investors with mid and longer-term durations to capture value from the inflated premiums in the options markets right now. For the most part, these strategies will tend to fall into one of 2 categories: collecting premiums by selling expensive near term options in-line with a fundamental view on the underlying equity, or capturing longer-term directional exposure “cheaply” by exploiting steep implied volatility curves.

If any subscribers are interested, I would be happy to address specific strategies in the context of your portfolio. You can reach me at

Andrew Barber
Director