Plummeting Volatility Gauges Mask Lingering Fears in Options

The sharp drop in volatility may hide the extent to which U.S. stock market fears still persist.

So says Macro Risk Advisors head of derivatives strategy Pravit Chintawongvanich, who has zeroed in on September VIX call options with a strike price of 20 to show that there are still concerns about a sharp selloff in the near future.

The implied volatility of these derivatives, tracked by the VVIX Index and which would be in the money if the VIX rose to a level it hasn’t touched since the day after the U.S. election, only decreased modestly from Friday to Monday.

Macro Risk Advisors

"In other words, upside VIX tail premium is still bid, reflecting high ‘vol of vol’-- the VIX can jump around between various levels very quickly," he said. "The lower VVIX is probably due to the vol premium on VIX puts collapsing."

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