The 20-day realized volatility of the S&P 500 ETF (SPY) has more than doubled in the last two months from a low near 7% to the current level over 15%. At the same time, implied vol (akin to VIX) has dropped 2-3vols during that period and almost 5 vols in the last two weeks - nearing its multi-year lows once again. For the first time this year though, 3-month-implied volatility is trading below realized 20-day volatility and while they are apples-to-oranges to some extent (forward-looking vs historical), the 'cheapness' of volatility may well be enough to encourage hedgers back in - especially on a day when stocks pop unexpectedly. What is more worrisome though is almost exact replica that implied- and realized-vol are following when compared to last year in the run-up to the big mid-summer swoon as complacency is back it seems.
2011 Implied- vs Realized-Vol
Realized from around 7% to around 15%; Implied leaking lower, popped from 15% to around 20% and then back to around 15%; Implied vol crosses below realized vol; One-month later...