The realized (actual) volatility of the US equity market has plunged in recent weeks to its lowest since April 2015 as an odd complacency washed across risk assets emboldened by "whatever it takes" synonyms spewing from every and any central banker in the world. However, options traders appear to be losing faith in the market turmoil cease-fire as implied volatility (the market's best guess at future uncertainty) trades at its largest premium to historical volatility in over a year.
As Bloomberg reports, there have only been six days the S&P 500 swung more than 1 percent since the start of March, the longest comparable stretch of peace since May 2015. That’s lured automated funds that trade based on volatility trends to buy more U.S. stocks, increasing their ability to wreak havoc should markets start to crack.
Price swings have been relatively muted the past two months, but options traders are betting it won’t last. The gap between the one-month historical volatility, a measure of actual price swings, and what traders are willing to pay for protection is at its widest since August.
Implied volatility trades at a 55% premium to realized volatility – its highest in a year…
The last time this happened, as the chart suggests, the 'market' is perceiving the fragility in the calm is going to end very soon – just as it did in the summer of 2015, before the August crash.
via http://ift.tt/21QqyCk Tyler Durden