For the first time in a while, the term structure in the SPX is in the 9 handle for the next 6 weeks. That is back to my days in the SPX pit in the mid-90s, when 13% IV at the money was a sale and LTCM was just starting to make the big bucks. Why is it getting so low?
charts by www.Livevolpro.com
My guess is the rallies are starting to look different now. Stocks can go higher, but the easy rallies due to the Fed jumping in with stimulus money are done. The Fed is pulling out, so the rallies are more of the old fashioned kind – better fiscal policy, productivity and technology, and company earnings, etc. Those items make for the slow, volatility crushing rallies that we see today.
As a market maker, I always thought that IV could jump when a big move was possible in either direction and that really sent things flying. Stocks can still go higher, but it will be a grind.
Avoid selling too much ATM premium in the indexes for now. Buying upside butterflies with a cheap put for protection makes more sense.
Submitted by atg on Tue, 05/27/2014 follow Andrew @optionvol