Beware Friday's OPEX, JPMorgan Warns "Volatility Too Low, Disconnected From Fundamentals"

Tyler Durden's picture

Many market participants are scratching their head as to whether the low VIX levels are an anomaly or some kind of utopian new normal. JPMorgan's Quant Derivatives shop warns the current environment is not similar to the great moderation of 2004-2007 as volatility appears to be disconnected from fundamentals and pressured by structural effects, including central bank intervention, low trading volumes, and pressure from option hedging. Crucially, based on an examination of 'gamma imbalances', the current (low) volatility regime may change significantly after the June expiry.

As JPMorgan explains...

Low Volatility – Anomaly or a New Normal? Many clients have asked us whether the low VIX levels (1M median: 11.7) are an anomaly or a new normal. We have heard analysts arguing that the low volatility is fundamentally justified and the current environment is similar to the 2004-2007 time period. To assess current levels of volatility, we have analyzed the VIX in light of recent Macro data, Volatility of other asset classes, and various structural drivers. Our view is that the current environment is not similar to 2004-2007 as volatility appears to be disconnected from fundamentals, and pressured by structural effects. In our recent report on the VIX, we analyzed the ability of employment, manufacturing, consumer and housing data to forecast the VIX. Most of these macro series indicate that the VIX is about 3 points too low (historical success rate of these forecasts was 60-70%). During the 2004-2007 time period, these same macro models showed the low levels of volatility at the time were fairly priced.

Volatility in other asset classes such as rates, FX, commodities and credit spreads have also been very low. Some of the measures (such as G7 FX, Rates, and Oil volatility) are in fact at absolute all-time lows (VIX is in the 25th percentile of the 2004-2007 low volatility range). The only exception is credit spreads which are moderately higher now than during 2004- \2007. In addition to low levels, most cross-asset volatility time series (85%) have been declining in the last month – a signal that does not point to an imminent increase in volatility.

To further understand the current low volatility levels and compare it to the 2004-2007 time period, we looked at levels of market activity and structural drivers of volatility. Firstly, there is much less trading activity now as compared to the 2004-2007 time period.

Figure 3 below shows a nearly 50% decline of equity share volumes since 2007. Volume and volatility are highly correlated (Figure 4, current low volumes/volatility are denoted with a red dot). Volatility and volumes are linked by a positive feedback loop (lower volumes lead to lower volatility and vice versa).

Lower market activity is likely due to relative decline in activity of levered investors such as hedge funds and prop desks, and relative increase from less active investors such as corporates performing buybacks, or asset managers increasing equity allocations. Relatively high valuation of equities is also not supportive of higher volumes and volatility, as value-driven investors gradually step away from the market. Low realized volatility and the low yield environment further invite volatility sellers of all shapes and forms which is putting further pressure on implied volatility measures such as the VIX.

In addition to low trading activity and option selling, volatility has been under pressure from the hedging of options. Figure 5 above shows the S&P 500 call-put gamma imbalance that has recently reached all-time high levels. Gamma (per 1% S&P 500 move) of call options was $25bn higher than the gamma of put options last week. As investors on average tend to sell call options and buy put options, hedging of these positions puts pressure on realized volatility and this pressure is higher than it has ever been.

In summary, we see the current market environment as different from 2004-2007. Volatility appears to be too low and disconnected from fundamentals. However, the low yield environment and support from central banks is currently keeping volatility low not just in equities but across asset classes.

Additionally, equity volatility has been held down by low trading activity and option hedging pressure. As we will discuss below, some of the option-related pressure on volatility will abate after the June expiry, which could result in higher realized volatility.

One more thing...

Option Expiration: About $900bn of S&P 500 option notional is expiring this Friday.

The current ratio of Put to Call contracts outstanding is ~2 which is near all-time high levels (98th percentile over the past 15 years). The high ratio of Puts to Calls may on the surface suggest that investors are well hedged and bracing for a market decline. However this is not the case as most of the put options are far out of money and ineffective at current market levels. Figure 9 below shows S&P 500 options open interest by strike. Currently, ~80% of put open interest is below the 1850 strike and would not be an effective hedge for a ~100 point market pullback. This is also illustrated by the directional exposure (delta) of put options that is only ~$40bn (on ~$650bn of June Put notional open interest, i.e. the average delta for all June puts outstanding is only ~6%).

While it is hard to forecast if and how investors will roll these put options, the directional impact of rolling protection to higher strikes could have a negative impact on the market. Assuming naively that clients are long puts and short calls and roll all June options (calls and puts) 3 months out and 100 points higher, this would lead to an incremental change in total delta of negative ~$100bn of S&P 500.

Despite the high put-call ratio, the total gamma of calls is currently ~$15bn larger than the gamma of puts, which is pressuring realized volatility lower. However, about $10bn of this call imbalance will expire on Friday, leaving more balanced gamma positions thereafter. In addition, we think that if a significant amount of June puts (~$650bn of put notional) is rolled to higher strikes, it will further increase the put gamma. This in turn would be supportive of higher realized volatility post June expiry compared to realized volatility over the past month.

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Squid Viscous's picture

they will hold this cunt of a "market" at 1950-55 to fuck all the spy/dia/qqq etc. put holders, lather rinse repeat...seen this movie before, for about the last 50 op-ex dates

BobTheSlob's picture

Hey Asshole...I served...and I'll cut yer fuckin tentacles off as soon as I get off this couch, bitch.

Squid Viscous's picture

umm, you served? wtf does that mean?

Squid Viscous's picture

yeah maybe soft cones at the DQ, that would be serving someone at least...certainly didn't serve me if he's talking about being a jarhead

BobTheSlob's picture

Yep...cut off a tentacle....ram it up yer shitter...sounds like a plan.

flacon's picture

I was going to post something about the VIX but it seems the comments section must be from a different thread - perhaps the transgender surgery thread... 

BandGap's picture

Post away. The VIX is meaningless.

Ever try to drink a twelve pack of Miller High Life you left on the counter, before it gets warm? Halfway there, Vicks.


Squid Viscous's picture

wow you sound like a real tough guy, must be all those pushups at Quantico... if you want to continue i will fuck you up, let's meet

BobTheSlob's picture means this ahole was blabbing about people stupid enuff to serve based on a Nov 10 date I posted. Get it now squidvicious?

Squid Viscous's picture

yeah go for it, re-enlist if you can and go die in Eye-rack you fucking idiot

BobTheSlob's picture

LOL...not a chance...I make more dinero here now...ORDERS of magnitude.

But your condescention makes me quickly comprehend that you are nothing but a pussrocket. If you are under 30 let me suggest that you get a professional.

Not a shrink, but one that will teach you to kill something...and not be a pusstard the rest of your life.

Squid Viscous's picture

yeah I want to learn how to kill ... that would be awesome - how about we meet and see who's the "pussrocket" (??)  -do you have PTSD? that must suck...

BobTheSlob's picture

Send me your address.

I promise you won't be disappointed!

Squid Viscous's picture

OK just emailed you ... let's see who's the internet tough guy

BobTheSlob's picture


Let me know what types of liquor you like. They tend to take out the sting.

BobTheSlob's picture

Still nothing in my inbox. Have anything else to bloviate about ex-vets asshole?

Don't think that your posts on other articles go un-noticed.

Squid Viscous's picture

no i hope they get noticed that's why I post them dipshit

BandGap's picture

Beer just shot out my nose reading that, Bob. Thank you very much. The wurld is getting more stupider.

Have you had sex with anyone other than yourself lately?

BobTheSlob's picture

LOL...good one. You sound like a solid Alynskyite. Google it.

BandGap's picture

You used google as a verb.

You started off as an asshole, any interest in changing direction?

Beer #7.

BobTheSlob's picture

Nope. Asshole = the ultimate contrarian.

Don't like it? Wow what a shock!


BandGap's picture

No Bob, asshole = asshole.

Have fun beating up people, you burly man you.

BobTheSlob's picture

Yep...tell that to squidward tentacles. He likes to badmouth vets.

Otherwise P!ss off!

Squid Viscous's picture

Bob please remind where I "badmouthed" Vets, I feel sorry but that's different

tankster's picture

I believe it's ear-rock. Sorry, couldn't  help myself..

litemine's picture

Sorry but we will forgive you........if you have learn from your mistakes.  Fool me once.....comes to mind.

PhoThus's picture

Wow. Tyler how about simplifying that article a bit. Why does buying higher put strikes increase the volatility?

alien-IQ's picture

hmmmm...perhaps tossing a small amount of money at some out of the money VIX calls might be in order...a lotto ticket.

what's that smell's picture

me thinks squid viscous and bob(the knob)slob are the same sick twisted troll scribbling to himself.

"take that bitch!" "gonna fuck you up!" No! Mom! I don't want to clean the basement!" "Be a good boy."

i got a nice bridge for sale, troll.


HedgeAccordingly's picture

A vol spike will come soon. Swift. A summer swoon.


BandGap's picture

I have adult onset diaper rash.

Looks like people are leaving the casino. And the machines still make noise.

BobTheSlob's picture

I'm not even remotely drunk enuff to get any of this. Heck, my Dr. stuck his finger in my posterior last week and was talking about the same gamma imbalance.

Tyler a new approach: When we need to sell, just post a big four letter post that says SELL in big red letters.

BandGap's picture

Bob, I didn't know you could read. Good for you.

Have to werk on that spellin.

BobTheSlob's picture

Yep...posterior = posterior.

Sorry about that one.

NoDebt's picture

Where you been the last 5 years?  Are the flashing neon signs in ALL CAPS not enough?

ZH is fantastic at exposing conspiracy theory as conspiracy fact.  They've done it many times (documented).  For those small slices of the market those things affected, they're solid gold.

OVERALL market performance.... they've been on the wrong side of this unprecedented 5 year bull run consistently.  Not that it's their fault, really, but they keep holding onto this idea that markets even exist any more.  They don't.  There are only central banks now.  And central banks are NOT letting this miraculous asset price recovery be endangered by something as unpredicable and dangerous as "market forces".


disabledvet's picture

Never followed the investment advice here tho.

Jumped off the crazy pants trade over a year and while not recommending anyone short this thing have been truly astounded by the move higher continuing. Bears better have one good day this week.  They haven't had a good one in five years.

Today was classic betazoid freak out.  Bears never had a chance.  "Springtime for Hitler." 

Move along.

deflator's picture

 We need a volatility index for the volitility index. Got an email from broker last week that my 11 target for VIX that had been set 5 years ago had been reached. Doesn't look like such a good buy now.

Frilton Miedman's picture




VVIX on CBOE = VIX volatility

gianakt's picture

CFD SP500 top is in at 1959.70, long anticipated 16.71% correction has begun till this fall. No one is willing to go short.

texas economist's picture

More likely, given organized support of equity prices, low volatility and low volume are tools that are cultivated for the purpose of elevating prices. In other words, with low volume and low volatility stock prices are manageable. A good analogy is the process of sailing into the wind. A boat can sail into the wind but not a hurricane force wind.

<a href="">Common Sense Economics</a>

I Write Code's picture


As investors on average tend to sell call options and buy put options

Huh?  Who took the other side?

I don't know why most of those factors should have any relationship to VIX, but of course volume/VIX does, but that doesn't come near explaining why it looks so low in the McClellan summation index.  The Fed is clearly holding these aggregate factors just where they want them for occult reasons they don't share with mere mortals.

But I too suspect a break is coming, one way or another.  Or else even a further tightening that I presume would be totally unprecedented.

Frilton Miedman's picture

Over it's 2-1/2 decade history, the VIX tends to trade in five year phases marked with lower and higher bottom ranges.

The higher 5 yr range tends to bottom at ~16, the lower At ~10.

We saw the higher range from 2007-2012, that puts us theoretically right at the low point of the lower five year range.

We're likely to see the Vix bounce off this 10-11 level for the better part of a year, but cautiously buying the VIX at this level is a reasonably good idea regardless, especially before expiry.


Seal's picture

“Excess generally causes reaction, and produces a change in the opposite direction, whether it be in the seasons, or in individuals, or in governments.” Plato

TonyStewart14's picture

If the Fed, ECB and every central bank are providing a liquidity put to risk assets, why would you ever buy a put when one is being provided for free?  Likewise, the massive stock buyback programs that are currently supporting the market act as another free put for those long equities.  Volatitily has been crushed.  The central banks have won.  Absent a direct attack on the United States or massive earning misses, volatility will remain very low for a long time.   

Ban KKiller's picture

AAh...the relics of a free market.

TheRideNeverEnds's picture

inb4 VIX prints under 10

Wait What's picture

Central Banks have reached securities markets Nirvana.

this is the point at which the gambler would be well advised to take his winnings and leave the casino...

but obviously this batch of central bankers are the kind of gunslinger gamblers that will keep raising the bet to pick up those last few pennies before the steamroller is on top of them.

it's telling that despite all the noise about how 'it's time to start raising rates' these fools don't want to listen, totally oblivious to the reality that everyone else is seeing. Marriner Eccles might as well be Rapunzel's tower.