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Thursday, April 9th 2020

Too Quiet? The 2008 Analog For The Market Does Not Look Good With Implied Volatility Falling to 35%

The Global Financial Crisis analog to the current market foretells trouble ahead given implied volatility levels.

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Summary

The options market implied volatility (IV) is currently at 35%, similar to levels seen during the 2008 Global Financial Crisis (GFC). However, historical volatility (HV) is currently around 80%, making the low IV a dangerous sign for bulls. The corona market looks better than GFC, but the options market is too quiet and hope is not what you want to see as a bull.

The options market implied volatility (IV) is good at reflecting the sentiment of the market. The old Wall Street refrain is that the market climbs a wall of worry and slides down a slope of hope. Looking at the implied volatility graph since news of the corona virus, the market turned bullish when worry was at its greatest. IV hit 75% in the S&P 500 ETF SPY. Now with implied falling to 35%, it seems the market is hoping the worst has passed.

 

The 2008 Global Financial Crisis (GFC) has similarities to the current corona market. Back then, implied volatility peaked at 75% at the market bottom. The same happened recently for the corona market. The GFC market rebound topped once when the IV fell to 45%. Corona had a small top at 45% only to rebound quickly to higher highs, a bullish sign. The GFC market topped again at New Years 2009 when IV fell to 35%, but the SPY price slid another 25% to March 9th.

Are we in for another melt down like what happened during GFC?  The price action in the corona market looks better than GFC, but this is a dangerous time for the bulls. The options market is too quiet: Implied volatility is very low relative to recent levels and relative to what historical volatility has been.

Historical volatility (HV), the measurement of the price statistical volatility, for the past 20 days has been around 80%. In the GFC implied didn't fall to 35% until the HV got down near those levels. The fall in implied currently with HV so high is very hopeful of the market. And hope is not what you want to see as a bull.

 

 

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The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors. For more information please see our disclaimer.
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