Even as the S&P 500 Index's 30-minute intraday volatility has been lurching below Thanksgiving week, pre-Dubai levels in the mind-numbing 5% zone (Chart 1), the CBOE Market Volatility Index (VIX) has been gaining ground this week after tagging 52-week lows the week before (Chart 2). This is not surprising, in the sense that the "obvious play" is for heightened volatility as we move into the New Year.
What may not be as obvious is the fact that there is plenty of "juice" in current VIX levels north of 20, as evidenced by the fact that 14-day historical volatility (HV) of the S&P is now below 9%. The last time S&P 14-day HV was this low was in May 2007, at which time the VIX was trading in the 12-14 zone.
Almost everyone who doesn't trade by scooping up pennies over holding periods encompassing milliseconds would welcome a return to some semblance of "normal" volatility as we move into January. But the most logical way to trade this is not by playing an overvalued VIX and its accompanying overvalued futures and rich call options, but through "plain vanilla" trades that are structured to be long equity option premium, such as in-the-money strangles.
Chart 1
Chart 2
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