If you have been watching market news over the last few months, there have been plenty of articles talking about how low the VIX has gotten and how we are back to levels not seen since 2007 or earlier. What they do not talk about is how the VIX is extremely short sighted. At a one month measure, the VIX is looking through foggy scratched glasses while sipping on red bull. What is more interesting to me is how long-dated options are pricing risk. The volatility of the market over the next month is usually a bit easier to figure out than the volatility over the next year. Now try to think about predicting the next 5 years…
Five year At-the-money implied volatility got north of 40% in the heat of the global financial crisis. Ever since then the 5 year vol has been headed lower and most recently it has traded between 19-20% since the beginning of 2014. This level has not been seen since 2007. The fed has tamed the market. The only real question is what happens when they let it go?
