The VIX has touched close to an all time low at 13.07, and at this point options aren’t just cheap, they’re the cheapest they’ve ever been.
Since the Vix is really the implied volatility of the oncoming month’s options, if we plot the VIX with the actual one month move after the date, we might see if the “low” VIX is tradable. A VIX of 13 or so probably expects the index to move about 3% in the coming month. To give you an example, today:
- the index is at 7936,
- the September 7900 call/put are at 156/74,
- which implies a range of 7630-8130, if you sold both and got a premium of Rs. 230.
- which is about 3% in either direction.
So technically a low Vix (15 or below) means that 3-4% moves are probably acceptable, but anything more should give a straddle buyer a profit.
Let’s see the plot:
I’ve shaded the “non profitable” zone of +4% to -4%. If a one month move lies within that range it’s not all that great for an option buyer.
In the last 1.5 years, we’ve hit the below 15 range four times.
- In Mar 2013, when we hit the 13 level, the Nifty moved -6% in the month. (Put option buyers would have done well)
- In end-April 2013, a similar move of the VIX saw the index move about 1% to 3% (Not good)
- In March 2014, the move was beyond +5% in a month, while the VIX was low. (Call buyers positive)
- ANd now, since July, the VIX has been falling. We don’t know what the Index will look like a month later.
There are other smaller data points out there, but I think there’s no clear trade this way or that.
But of course these are too few data points, so let’s take a longer term look.
Again, here, the VIX shows it was benign in Oct 2012 to March 2013 (mosly under 15) but the one month index move wasnt quite much.
It’s a little too early to say this but we are probably going to see some volatility in September. But will it be enough to cover a 240 move in either direction?
Now, tell them about it: