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Volatility Is Dead

19 October 2016 by lberuti

Today was option expiry, so it is only fair that we talk a little about volatility. Since the beginning of the Corporate Sector Purchase Programme (CSPP) announcement in March, and even more since its effective start in June 2016, risk premia in Europe - but also in the US - have experienced extremely low volatility, barring a short spell before and right after the UK referendum which eventually led to Brexit. The 20-day historical volatility of iTraxx Main (ITXEB) stands at 23%, which is its lowest level over the last 3 years. Daily moves have been minimal, and if you correct the time series of ITXEB - respectively CDXIG - from the roll effect on September 20th, it has stayed in a 65bps/71bps - respectively 68bps/76bps - range since the 12th July. It is no wonder then that options implied volatility has come crashing down. At the money 1-month implied volatility is trading at 35%, while it was worth 45% at the end of September. As risk premia are at the tights of the year, it means that it has never been cheaper to protect your portfolio against an unexpected blip in the market before year-end.