Most of the week Dec VIX futures were at a discount to the spot VIX index. This was despite the November employment report being released on Friday. The market yawned at the report with the S&P 500 finishing up slightly on the week and VIX finished the week basically unchanged. The December contract spent most of the week at a discount to the index, but traded to a slight premium on Friday. January was slightly higher while the rest of the VIX futures contracts traded lower and the result was a flattening of the curve.
The December futures price action, basically in line with the index, is a clear indication that the market expects any volatility to occur after December expiration (December 19). On the other side of the coin, January futures are at a consistent premium to the index and of course December contract. From an academic and market watcher standpoint this is an interesting scenario to watch unfold.
The NASDAQ-100 and VXN activity was a completely different story last week based on price action in a single stock – Apple (AAPL – 533.25). The NDX lost about 1.4% last week and VXN traded up over 9% on the week. The interesting thing is that the futures curve experiences a fairly parallel move. This indicates that the feeling in the market place is that higher volatility for the NDX may be around for a while.
With VIX drifting around last week and December VIX futures at a discount to January contracts the long VIX ETPs were mostly lower on the week. Something of note was the underperformance of VXZ which indicates lower anticipated volatility in the 1st quarter of next year. Every VIX future contract from February out was lower last week and this is reflected in the VXZ losing over 2% on the week. The majority of ETPs focus on the front two month contracts and it appears December futures are going to be complacent, while the January contract is the one that gathers all in the attention for the rest of the year. This thought depends on the fiscal cliff talks dragging out until after December expiration and being resolved (one way or another) before January expiration.
The hedged and low volatility funds did well as US stocks were slightly higher despite the weight of AAPL. Emerging markets our performed US stocks (AAPL is not in that index…) and that can be seen with the EEMV being the best performing of the actively traded VIX related exchange traded products.
There was something new in the exchange traded product area this week. On Thursday the PowerShares S&P 500 Downside Hedged Portfolio (PHDG – 25.16) began trading. The press release describing the strategy behind PHDG involves exposure to the S&P 500, VIX futures and cash depending on market volatility. This ETF joins the VIXH, which uses VIX call options dynamically combined with investment in the S&P 500 to achieve hedged performance as a convenient method to have equity market exposure hedged with volatility exposure.
The word of the week in the VIX Options pit was ‘quiet’. Whenever I hear that the old saying, “it is quiet…too quiet” pops in my mind. VIX was fairly range bound, VVIX is low, and December VIX futures were trading at a discount to the VIX index most of the week. An article I came across mid-week did note that the majority of VIX option trading is in opening new out of the money call positions. The article highlighted huge open interest in the VIX Jan 25 Calls (almost 400,000 contracts) as an option that appears to have a lot of demand as a speculation on or hedge against the stock market dropping if we go over the fiscal cliff.