The continuing rally in equities has resulted in some remarkable volatility readings. 21-day realized volatility in the S&P 500 closed below 10% on Friday , and the spread between 21-day realized volatility and spot implied volatility 30 (calendar) days ago is wider than at any time in 2009. While option implied volatility regularly tends to run higher than the realized volatility in the underlying, current readings are extreme. Since equity volatility is mean-reverting, it is fair to expect an increase in realized vol, a decline in implied levels, or both. The case is bolstered by the overbought status of equity prices. The VIX futures term structure fell about a full point last week.
Gold options are still as fairly valued as they’ve been in months.[12,13] As I mentioned last week, oil options were somewhat overpriced relative to recent realized volatility [16,17], though OVX (the VIX-style index for USO) continues making new all-time lows.