Over the past days, several of the people we use for “contrarian” set ups have started all talking the same view. Volatility is going to stay low seems the consensus trade out there. Maybe this is the paradigm shift and assets will continue to almost not move, but given the fact all volatilities have imploded recently, and Fed is about to enter the stage, there are definitely interesting plays and opportunities to use cheap optionality. Below is a quick run down of the “impressive” implosion of volatilities.
VIX continues moving lower. The entire move from the October sell off is gone.
Emerging markets “VIX” sees little risk and has fallen massively, trading at last February levels.
Oil volatility, one of the biggest drivers of risk last autumn, has given back the entire “panic” move.
Emerging markets FX volatility has made an “impressive” move lower and continues down on a daily basis.
Developed markets FX volatility knows of one thing only, going lower.
Gold volatility crushes new lows every day.
High yield ETF, HYG US, has seen imploding volatilities as well. It does not matter what global asset you pick, volatilities are down. You can argue that the market is cheap or expensive, that it will retrace or break new highs etc, but our point is, at current levels of implied volatilities, the market is pricing practically no possibilities of any “extra stress” to the system. Assuming “nothing” will happen can prove to be very expensive. Hedging positions is by definition a “cost”, but at these levels of global volatilities, it sure is a relatively cheap hedge.
Charts, by Bloomberg