Friday, January 30, 2009

SPX Volatility: Long Dated Vol Not Correcting

SPX Vol surface not correcting - still building large "mid range" formation which means either new vol regime is low 40s and extremely large peak still to come, or that the rules of vol have changed. Vol regime in 40s is unsustainable and indicative of an economy in extreme stress for the the long run.

SPX volatility should be watched in the long dated implied, one year or longer, to consider the "risk" in the equity market and also to calibrate to ideas on credit spreads. SPX (comparable to AA plus credit) in the long dated implied space has not corrected form November crash. The short dated implied which the VIX picks up is incorrectly providing a sense of improvement. This explains why high grade credit spreads are sticky and haven't followed the SPX market when it moves upwards.

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