On Thursday, we brought you a sweeping piece that touched on a multitude of topics that are near and dear to us including, but not limited to:
- the extent to which modern market structure poses a bigger risk than most people are willing to admit;
- and the mechanisms and dynamics that transformed “BTFD” from a derisive meme about retail investors’ penchant for gullibility to a viable “strategy” optimized for an environment governed by the two-way communication loop between markets and monetary policymakers.
In the course of that discussion (which ended up being quite a bit longer than we meant for it to be), we excerpted a few highlights from the latest outlook piece by Goldman’s Rocky Fishman who, along with colleagues John Marshall and Katherine Fogertey, attempted to make some projections about the likely evolution of volatility in the context of the incoming macro data.
For our part, the most important takeaway was the bit about a shift in sentiment engendered by the February vol. shock which Fishman and co. suggested “was perhaps as significant [an event for psychology] as the Summer 2007 Quant meltdown.”
The context for this discussion is of course the snapback in the VIX from the early February panic levels.
On Thursday, the VIX closed at its lowest level since January and in a new piece out this morning, Rocky is back and he thinks long vol. strategies are timely given that realized hasn’t come in enough considering the retrace in the VIX.
“Implied/realized vol risk premium is stretched to historical lows,” he writes, adding that “a regression between the VIX and its best-fitting exponentially-weighted SPX realized volatility (we see a 13-day half-life as the best match for the VIX) indicates that the VIX should be around 18.7”. Here’s the chart on that:
He goes on to flag what he calls “one of the most persistently low implied/realized ratios on record”:
Meanwhile, the econ suggests the VIX should be around 15 (more on that in the first post linked above). The takeaway: well, obviously the takeaway is that options are cheap and that informs Fishman’s contention that long vol. strategies are “increasingly timely”.
“There is a mismatch between how little SPX options cost and how much the SPX has been moving (3.5% rally over the past five trading days),” he continues.
Take all of that for what it’s worth and remember: if you hear someone say it’s time to get long vol. (even if their rationale is based on math rather than some dour macro projection) and that unnerves you, you can always hop on Twitter and find some confirmation bias for your overtly and persistently rosy outlook from your favorite talking heads.