Liquid Vol

You look at me from across the room
You're wearing your anguish again
Believe me I know the feeling
--Paula Cole

Volatility indexes are once again touching levels last seen in mid 2007.

Yes, they can go lower and remain there for some time. I recall many who were long vol back in 2005 agonizing over their positions as their options dripped theta by the day.

One similarity between then and now is high levels of liquidity being poured into markets by central banks. "The higher the liquidity, the lower the vols" is a good general proposition.

The thing to remember about implied volatilities is that, while they can 'trend' lower, they rarely do so higher. Vols typically 'spike' higher, leaving those who chose not to buy cheap volatility (for protection or for spec) in the dust.

Stated differently, in a highly levered system like ours, you never know when liquidity will dry up. If people become risk averse and decide to close projects funded by credit money, then price fall and vols rocket.

This makes vols tough to trade--both momentum and contrarian styles often take a beating.  They also tend to be ineffective forecasting mechanisms, since implied vols express general conditions of greed or complacency but little in the way of condition change.

As such, we can only confidently say the vols right now are getting historically low. Descriptive rather than predictive.

position in SPX