On Volatility

Historically, October is a volatile month for markets. It is in fact the most volatile month of the year. But as of today, both the VIX and the MOVE, the indices that measure volatility for equities and Treasuries in the U.S. are near lows for the year. In the chart below, however, we may find a clue to points to a not so distant surge on the VIX: the red line is the realized volatility, in other words, the calculated standar deviation of daily returns of the S&P500 index. The blue line is the 1 month variance swap, and since it’s well above the red line, it’s basically telling us that investors are betting on realized volatility spiking within 1 month. Perhaps they’re just betting on the seasonality of vol, or they are anticipating a rocky earnings season. Or they are simply hedging their positions, but usually, the red line converges to the blue one, so we might get some action before month end. There are plenty of open fronts to justify higher vol, such as the government shutdown, the Fed meeting, the national guard in Illinois or new developments in the international conflicts in Gaza and Ukraine, but it’ll likely be another factor that we haven’t accounted for.

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