VIX is low, we all know VIX is low. I type that and feel I need to stop channeling Dr. Seuss.
However, there are some pockets of volatility in the US equity markets, we just need to know where to look. Since CBOE quotes several volatility indexes that are based on the US markets I went searching for places where the market is still pricing in a little concern about the future. Two areas that stood out – tail risk and small cap risk. Let’s start with tail risk.
The CBOE SKEW index is a measure that takes out of the money put option volatility and compares it to the implied volatility of SPX put options that are not as far out of the money. If SKEW is equal to 100 then the out of the money IV is in line with that if SPX puts with strikes closer to the levels of the S&P 500. SKEW is typically around 120 or so and came in at 130 yesterday. I like looking at volatility measures relative to other volatility measures and the outcome for SKEW appears in the chart below. This chart shows the daily levels for SKEW divided by VIX going back to 1990. Note it rarely moves over 12, but that’s where it is right now. This may be read as out of the money stock market protection is expensive relative to the cost of at the money SPX options.
The second area of high volatility relates to small cap stocks in the US. CBOE quotes VIX, but we also have the CBOE Russell 2000 Volatility Index (RVX) which gives us a consistent measure of Russell 2000 (RUT) implied volatility like VIX does for the S&P 500. With a handful of exceptions RVX has always closed at a premium to VIX. However, it rarely is at more than a 60% premium to VIX like it is as I write this blog. We can take that as option premiums for RUT options are relatively expensive when compared to SPX options or that traders are more willing to pay up for small cap protection than large cap protection.