The options market has continued to express some relative optimism about the near-term trajectory of the equity market. The VIX decreased from 65.5 to 46.8, and one month, 25-delta put skew also decreased 3.9%.
We are less optimistic than this. The recent economic data releases that include the preliminary impacts of the coronavirus pandemic have been abysmal. For instance, the enormous initial jobless claims number the Department of Labor released on March 20th (3.307 million). The subsequent weekly release on March 27th was more than double that, at 6.648 million. There simply are no modern parallels for the economic impact of an essentially nationwide “shelter-in-place” order. For example, a recent article in the Wall Street Journal estimated that 25% of the US economy has been taken offline. We are hard-pressed to believe the S&P 500 low turned in on March 23rd (2237.40, or -3.8% off the prior high) will be the ultimate nadir of this Implied volatility actually struck a bit more optimistic tone. The CBOE VIX remained in the 60s throughout the week, which is deeply inverted relative to the realized volatility previously mentioned. In fact,
Recent Market Commentary
The domestic equity market set two new, diametrically-opposed records the week of March 30th:
- This March saw the highest ever S&P 500 realized volatility at 93.4%, surpassing the previous record of 91.0% set in October 1987. For reference, October 2008 had the highest realized volatility during the Great Financial Crisis (80.8%).
- April 3rd saw the largest ever VIX – 1M realized inversion at -46.3%, which extended the already record-setting inversion seen in the last two weeks
An inversion of implied volatility, relative to realized, is the options market expressing the expectation that implied volatility will decrease from its current level. For example, the largest inversion outside of this current volatility flare (-36.6%) was on November 11th 2008. At that point, realized 1M volatility was 84.3%. By December 31st 2008, realized 1M volatility had decreased to 38.2%.
The evolution of recent one-week volatility would suggest the market is on a similar volatility trajectory:
- 03/02 – 03/06: 62.1%
- 03/09 – 03/13: 130.6%
- 03/16 – 03/20: 106.6%
- 03/23 – 03/27: 89.2%
- 03/30 – 04/03: 50.2%
While we think it is likely that realized volatility will come down from the current historic levels, we do not anticipate volatility returning to anything close to average in the near term.