The options market implied volatility (IV) is good at reflecting the sentiment of the market. The old Wall Street refrain is that the market climbs a wall of worry and slides down a slope of hope. Looking at the implied volatility graph since news of the corona virus, the market turned bullish when worry was at its greatest. IV hit 75% in the S&P 500 ETF SPY. Now with implied falling to 35%, it seems the market is hoping the worst has passed. The 2008 Global Financial Crisis (GFC) has similarities to the current corona market. Back then, implied volatility peaked at 75% at the market bottom. The same happened recently for the corona market. The GFC market rebound topped once when the IV fell to 45%. Corona had a small top at 45% only to rebound quickly to higher highs, a bullish sign. The GFC market topped again at New Years 2009 when IV fell to 35%, but the SPY price slid another 25% to March 9th. Are we in for another melt down like what happened during GFC? The price action in the corona market looks better than GFC, but this is a dangerous time for the bulls. The options market is too quiet: Implied volatility is very low relative to recent levels and relative to what historical volatility has been. Historical volatility 20 days has been around 80%. In the GFC implied didn't fall to 35% until the HV got down near those levels. The fall in implied currently with HV so high is very hopeful of the market. And hope is not what you want to see as a bull.
It's an interesting piece you've presented, however, the context of 2008 and now are completely different. 2008 was a (preventable) structural collapse, whereas the current situation is force majeure. Based on that significant difference, drawing conclusions or strategies through the single lens of volatility is not apples to apples imo.
Although the VIX is about half what it was a few weeks ago, the current reading of 42 is still relatively high. I could be wrong, but usually bear markets do not end with everyone looking to buy the bottom. Don't they usually end when no one wants to buy? Perhaps the Fed and government bailouts have changed that dynamic. Everyone seems to be thinking that the Fed will always backstop the equity markets and low interest rates justify much higher P/E ratios.
The Fed backstopped the market every time it threatened to fall below the 200MA for a decade. Now after the longest bull market in history (11 years) the Fed immediately throws “unlimited funds” and ZIRP after only a 3 week “bear market”. All Fed mandates are bullshit. The Fed is there solely to make sure the stock market NEVER drops again.
Don't fight the Fed, right? How long can they do this? The good news for options owners is that the realized (historical/statistical) volatility is still about 55% measured over the last five trading days so you can scalp gamma and still stay afloat until what I think will be a messy ending to this intervention.