Much has been said of the ‘low VIX’ right now. ?I would question whether the VIX is really that low. ?Consider this, in the last 10 days, the market has moved at a less than 7% annualized rate. ?Over the last 20 days, the movement has been about 11%. ?Even 30-day HV, which includes some of that mess from the Election, is near 13%. ? Yet, VIX is near 16%. ?Take a look at the way it looks on a chart from LiveVolEx:
Livevol (r) www.livevol.com
The spread is at the widest it has been in some time. ?We can see the last time things widened out like this was in August. ?I would also point out that IV did tick up a touch at that point, and realized volatility absolutely picked up. ?I would also remind traders that the market RALLIED when things got this wide; it did not fall. ?The reason: ?my theory remains that the market is much more hedged than the public realizes. ?That is why the VIX is managing to stay near 16 despite nothing happening in the market.
The Trade:
With IV and HV where they are, we think a short term butterfly makes a lot of sense ahead of any movement. ?It has defined risk and should pay well with the current IV spread.