Volatility is spiking in today’s session. Renewed trade war fears is among one of the reasons markets are increasingly nervous and volatility trades higher.

VIX is trading up and is close to levels we haven’t seen since early April.

Euro Stoxx 50 volatility is higher as well. Note V2X is up approximately 60% since June lows.

Is it time to panic? Well, that nobody knows, but given the fact volatility is up substantially over the past weeks one really needs to discount rather bad times going forward in order to buy volatility  at these levels. Volatility is a mean reversing asset, let’s not forget that.

A few weeks ago VIX was trading at low 11 while now it trades close to 18. For the non professional trader it is worth pointing out that volatility is proportionate to the square root of time. This simply means that an approximately 1% move in S&P 500 corresponds to 16% implied volatility. As VIX approaches 18 the market basically start discounting approximately 1.15 percentage moves daily. This is surely possible, but if it is probable is another thing….

Buying volatility here outright is a rather late trade, unless you really fear an imminent  market collapse or you need to hedge your book desperately.

Buy volatility when you can, not when you must.

Below is a chart showing the term structure of the Euro Stoxx 50 index today (orange) compared to how it looked a month ago (green). This shows two things:

  • Volatility has spiked up across maturities
  • Short term volatility has increased much more than longer term volatility. This happens when markets get nervous and correct rapidly.

The same chart for the SPX index below.

Green line is 1 month ago, orange today and blue 3 months ago. We can clearly see volatility can continue and the term structure can continue to move as well (blue line), but note back then SPX traded at 2600. Next big support is around the 2675 level where the 200 day moving average is.

With volatility having spiked and taking another leg higher today, investors looking to make covered calls and other strategies that benefit from relatively high volatility should look at interesting set ups. Especially interesting is to get involved in shorter maturities since those options have increased a lot compares to longer term maturities.

(For more reading on options trading visit our derivatives and options trading link.)

Source: all charts via Bloomberg