Brent Kochuba Says the S&P Has Not Been This Still Since 2020 — watch on tastylive.
Brent Kochuba, founder of SpotGamma, joined tastylive Tuesday to explain why S&P 500 realized volatility sits at 2020 lows ahead of FOMC and a huge OPEX.
Oil broke to fresh highs near $104. The 10-year yield pushed over 5%. The S&P 500 dropped half a percent. Brent Kochuba, founder of SpotGamma, joined tastylive on Tuesday, September 15, to explain why S&P 500 realized volatility has compressed to levels last seen in 2020, and why that quiet looks unlikely to survive FOMC and Friday’s expiration.
Realized Vol Sits at 6-Year Lows
One-month realized volatility reads 9%, meaning average daily moves ~50 basis points. The long-run average runs closer to 68. Comparable lows last showed up in the autumn of last year.
Comparing daily highs and lows instead of close-to-close changes the reading to it’s lowest level since January 2020 — a stark contrast to close-to-close vol.
Mean Reversion Keeps Erasing Daily Moves
The market has seen a repeated pattern shown up over the past several weeks: Price sells off through the morning, a headline lands, and the index mean-reverts to unchanged by the close. A market that opens and closes at the same price registers minimal realized volatility, regardless of what it did in between.
That matters because realized movement is critical for estimating where implied volatility should sit. The low close-to-close volatility makes a critical input seemingly disappear.
Vol Premium Rests on a Suppressed Base
The spread between S&P one-month realized vol and the VIX historically runs three and a half to four points, which argues for a VIX near 13 or 14 against a realized 9.
The VIX instead trades close to 18. That leaves a vol premium of roughly four points into FOMC and expiration, and it scans rich only because the realized base underneath is so suppressed. If the index starts moving 1% a day, a 17 VIX stops looking expensive.
Below 7,600 the Hedging Flips
Under 7,600 the S&P sits in negative gamma, where dealer hedging presses with the move rather than against it. A sell-off into that zone forces dealers to sell futures while rising implied vol lifts put prices, which forces dealers to then hedge their positions by selling futures even more aggressively.
The gamma curve continues to grow more negative down to SPX 7,300. Put-call ratios in single stocks and the index sit at lows, so this is not a particularly well-hedged market.
Two Structures for Expanding Vol
Brent walked through two structures rather than one direction. On the downside, put flies around 7,400/7,300/7,200, slid lower for Monday, target the 7,300 trough if a convex move catches. A 2% to 3% drop in a few days would lift put skew.
On the upside, forward implied volatility prices the most event risk into November 4, so November or December call structures decay more slowly and hold their vol. Above 7,600 Brent leans toward the tech-heavy NDX.
What Would Change Brent’s Read?
We encourage traders to watch two things into the end of the week: whether the S&P holds near 7,600, which separates a market shrugging off oil and rates from one where hedging amplifies any selloff, and whether realized volatility expands once FOMC and one of the largest expirations on record clear. OPEX tends to mean-revert both price and vol, so a violent move into Friday can cut either way.
Brent Kochuba founded SpotGamma and contributes to tastylive. He was previously a portfolio manager at Seven North Capital Management, building options-based strategies, and a derivatives broker at Wolverine Execution, Credit Suisse and Bank of America.
Watch the full Gamma Guy segment on tastylive.
Gamma Guy runs Tuesdays at 10:00 a.m. CT on tastylive.