If excitability among option traders was last year's theme, so far 2016 has seen a docile derivatives environment.
Sharp declines in stocks and commodities failed to send VIX above 30, and the spread versus realised equity volatility has never approached the levels investors would associate with a major correction.
That means traders have failed to bid index option premiums significantly above the levels of recent market volatility even while the latter climbed higher. In other words, underlying financial markets are extremely volatile, but options have not kept pace.
During the August sell-off in 2015, the spread between VIX and SPX realised volatility was as high as 19 points.
But in terms of both vanilla put buying in SPX options and more exotic strategies involving VIX option spreads, the flood of demand last year now looks like a well-contained stream.
There are several possible reasons for the change — but none have much to do with a market which is more confident on the fundamentals.
First, more companies are offering funds that aim to capture the volatility risk premium by selling options in different ways, creating a new source of downward pressure on implied volatility levels. GlobalCapital reported earlier this month on the acquisition of an options specialist team from Horizon Kinetics by Neuberger Berman, reflecting rising interest in strategies linked to risk premiums.
Second, while last year's shocks may have caught some managers off guard, several systematic and discretionary portfolio managers GlobalCapital spoke to entered 2016 with less capital at risk, more hedges in place, or both. This may explain why intraday selling pressure this year has been more orderly than in the recent past.
Finally, tighter regulation and greater capital requirements have forced some sellside options desks to reduce their capital commitment or to operate entirely on an agency basis.
While this has removed one source of liquidity from the market, it also means that during adverse environments, there may be less cyclicality from those groups covering their own internal risk.
The relatively docile environment may continue, as the first and third catalysts above are secular changes in the way participants are using and being allowed to use options.
But as always, if new and unfamiliar risks emerge beyond the slate of scenarios investors are already dealing with, we could see new demand for tail risk protection, and options may prove worth the cost even at current levels.
For now though, given underlying strength in the US economy, the upside potential in Europe, and efforts in Asia to reduce capital flight, both realised and implied volatility looks set to stay low.