My sense of the markets at this juncture is that elevated implied correlations are truthful, even oracular,  with too-high index implied volatility representing not so much the jump risk with which the VIX is usually associated as the unwelcome prospect of individual equities tracking each other too closely. The most urgent scenario is of a strengthening dollar and unwinding “risk trade” in which good and bad companies are punished alike, and until that worry is alleviated, I see no reason to expect a change in the more sensitive metrics like the VIX term structure. [7,8]
As one would expect after a few weeks of range-bound trading, the ratio of thirty-day realized to lagged implied volatility is registering that S&P 500 options have been overpriced. Whether options will continue to overbid volatility is another question, and on the off chance that the easily alarmed options desk at a major financial news company eventually gets it right (in the “stopped clock” sense), now is as good a time as any to purchase some insurance on particular equities and sectors through February.
In the November 16 and November 8 issues of this letter, I suggested long exposure to oil volatility. Since that time short term implied volatility in crude oil options has risen from 38% to 43% amidst a 12% decline in the price of oil. Simple at the money straddles in short-dated options have performed nicely. At this point, however, oil options looking fairly priced [16,17] and continued directional exposure would only be warranted if the commodity promptly begins another leg down.
Traders eyeing elevated gold premia should continue looking until the metal has at least hinted at some consolidation.