SPX futures are up 5 points to 2108 this morning. ADP Employment data showed 182k new jobs were added in the US. The US trade deficit shrunk 15% to $40.8 billion. Europe and the UK bourses are higher this morning. The VIX futures are all modestly lower this morning on the bullish tone. The spot VIX closed 14.54 yesterday.
S&P 500 Index volatility (implied and realized) is right back around the subdued 2013-2014 average of a 14/15 VIX (graph below). This seems a bit peculiar given the Fed’s bias towards tightening and weakening economic data. Goldman Sachs issued a note yesterday describing just that sentiment. According to GS, “The options market seems to either be anticipating an inflection higher in the economic data, no rate hike, or an extreme lack of catalysts between now and year-end.” In fact, “S&P 500 1M implied volatility is the lowest among global equity indices.” Contrary to that, the Euro Stoxx 50, DAX (Germany), Nikkei, and Han Seng Index all have 1-month implied volatility sitting right around 19% and in the upper half of three-year readings.
The point of Goldman’s research is to take what the market gives you. And the market is giving you the chance to own cheap vol, regardless of market direction. According to their model which takes into consideration unemployment YOY change, ISM new orders, GDP and consumer spending, a 14/15 VIX is much too low. Their model spits out a 19 VIX. As of the Nov 2 close, you could buy 1M 25 delta calls on a sub-10 vol. If you are bullish, simply owning these calls is an inexpensive way to participate on the upside. If you are bearish, buy the OTM calls and sell SPY to create a synthetic put on that strike.