US equity market volatility has reached levels not seen in some time. The market (for the most part) continues to trade in narrow daily ranges which results in low realized volatility. As the moves are mostly to the upside VIX and VXN have come under some extra pressure. VIX went out Friday at 12.46. Do keep in mind that there is always a little extra pressure on VIX going into a weekend and that is exacerbated when we have a three day weekend upon us. VXN followed suite losing over 10% of value for the week. I hesitate to use this term, but VIX and VXN appear to be pricing in a goldilocks economy. A good portion of readers in their 20’s have no idea what that means, but those of us with a few grey hairs know the history behind that phrase. Needless to say, perfection priced into the markets never lasts and the markets tend to surprise us when we least expect it. A twelve handle on VIX makes me think the markets are not expecting any surprises.
I do like to focus on futures and February VIX Futures at a 2.19 premium and March VIX Futures at a premium of 3.84 to spot VIX indicates some volatility traders are still on edge or at least long some volatility ‘just in case’. Maybe the last shoe to drop in perfection being priced into the markets is a flat VIX curve.
Due to the continued weakness in VIX and shape of the futures curve long VIX related ETPs continue to come under pressure. The widely followed VXX lost over 9% last week as VIX broke 13.00 and the front month futures were at a discount of about 1.50 throughout the week. The combination of these two factors is never a positive for the exchange traded products. VXZ held up as the longer dated futures contracts were not under the same pressure as the near term VIX futures.
As all traders are probably aware of, VIX broke 13.00 this Friday, but that did not slow down out of the money call buying as a recurring buyer showed up throughout the week buying VIX Feb 20 and VIX Feb 24 Calls. Another trade of note that was spread throughout the week was a buyer of the March 20 / 30 Call Spread. I was in the pit Friday morning when 30,000 of those spreads were bought at 0.925.