This past week VIX was quoted at the lowest levels seen before the financial crisis of 2007 and VIX continues to spend time in the 13’s. The low level of VIX has been getting a lot of attention, but VVIX has also been making some significant lows. Last Friday VVIX closed at an all-time low of 75.18. Admittedly CBOE did not start quoting VVIX until just last year, but historical data is available on VVIX all the way back to 1/3/2007. Using this data, VVIX tends to oscillate between 80 and 120. However, this range may be changing as VVIX has spent many days with a 70 handle over the past few weeks.
Long ETNs have been under pressure due to low VIX and a return to the typical shape of the VIX curve. The pressure on these will continue until we get the next pop in volatility that inverts the curve and pops the exchange traded funds. VIXH and USMV both benefitted from the S&P 500 trading up 0.40% this week. VIXH is of particular interest as it matches the S&P 500 performance, but has that tail hedge in place for when the next volatility event pops up.
In VIX option trading January expiration is next week. Typically at this point the trading focus would be on February options, however, this time it is different. Traders seem to be looking past February to March options. The next drama to come out of Washington, DC is going to be the debate over the debt ceiling which will probably come to a head after February expiration, but before March. Because of this March call options have been active. A couple of trades of note last week – on Friday there was a buyer of the VIX Mar 25 / 35 Call Spread paying 0.595 and on Wednesday there was a buyer of the VIX Mar 20 / 30 Call spares as well. Both those trades need a good volatility spike to payoff.
“All anyone wants to do is talk about how low VIX has gotten.” That quote comes from Marty Kearney at the Options Institute on Friday. It is true, VIX is low. 2012 was the calmest year for the stock market as far as day to day volatility goes and the result is market complacency, lack of any concern, and much lower implied volatility than the market has had since before the crisis in 2008 to 2009. I find the January future premium of 0.79 a bit rich considering there are only two trading days remaining until January expiration. This observation may have me doing some data mining this weekend to explore the historical spread going into the weekend before expiration.
VXN ticked up slightly on the week even though the underlying index moved up a bit as well. This is not surprising due to the market being in the early phases of earnings season. Implied volatility of individual stock options tends to rise around an earnings announcement. Since the top ten stocks in NDX make up 50% of NDX weighting, VXN may be influenced by an increase in the implied volatility of some of these components.
In 2012 the spread between VXN and VIX was on average around 1.50, spreading out to almost 3.00 points and narrowing as much as parity. Some of the periods of a wide spread came during the earnings seasons in 2012 and once earning was behind us, the spread returned to a normal level. As of Friday’s close the VXN – VIX spread was at 2.51. In the futures markets the Jan VXN – Jan VIX Spread was 2.50 and Feb VXN – Feb VIX Spread was 2.30.