First Half of 2016 Confirms Higher Volatility Regime

We are already half way done with 2016 and it appears what we thought going into the year is being confirmed by SPX implied volatility. If the Fall of 2015 there was lots of chatter about the equity markets in the US shifting from a low to a high volatility regime. The low volatility regime had been in place for several years and the first signal of a change came back in late August 2015 when VIX topped 50 intraday for the first time since the great financial crisis. I have two favorite charts that give a good long term perspective on VIX and couldn’t decide which one to use so I settled on both.

First, we have the high low range plus average by year for VIX going back to 1990. We have higher low and a higher average over the first six months of 2016. In fact on the far right side of the chart the VIX low and average have both been moving higher since 2014.

VIX H L A By Year

The second chart shows the 1 year, 5 year, and 10 year rolling moving average for VIX over the last 15 years or so. It’s hard to see, but I promise that the 1 year average is slightly higher than the 5 year average. The last time we had a cross over like this was in November 2007. I don’t think anyone needs a reminder where the equity markets went after that cross over.

VIX LT Moving Averages

So the consensus thinking was we were shifting into a higher volatility regime and it appears that the first half of 2016 has confirmed the mind of the market.

Weekend Review – Volatility Indexes and ETPs – 6/26/2016

Global stocks took it on the chin Friday after the outcome for the vote in Britain determined that the majority of voters want to break from the European Union. Usually I show the week over week change for VXST, VIX, VXV, and VXMT to lead off this blog. Because the week over week change doesn’t tell the full story I included the closing prices from Thursday as well.

VXST VIX VXV VXMT Curve

The lowest line on the chart shows the closing levels for each of these S&P 500 oriented volatility indexes the day before the US stock market reacted to the news out of Britain. Two things stand out on this chart. First, the line is lower than last week’s close which shows that the one day move for volatility was greater than the week over week move for each index. Something else that stands out is the relative level of VXST to VIX. VXST is a nine-day measure of volatility as indicated by very short dated SPX option pricing. Regardless of how certain the bookies were in Britain with respect to the vote going ‘remain’ the option market was poised for a bit of short term risk.  Sometimes the financial markets are smarter than the gambling houses.

Every ETP on the table below is down for 2016 with one exception. The iPath S&P 500 VIX Mid Term Futures ETN (VXZ) finished last week up 1.33% and is up 2.42% for 2016. Otherwise the rest of the funds have suffered from the choppiness that has been the volatility markets in 2016. That type of price action took a toll on the inverse funds last week which finished down much more than VXX and the long funds were higher.

VXX Table

Many other things stand out on the table below. VVIX at 125.13 is a 2016 high. SKEW finished the week at 142.92 which is just a little bit lower than the 2016 high of 145.88. What is impressive about SKEW is that it is a measure of the relative implied volatility of far out of the money SPX put options compared to options with a strike price closer to the S&P 500. That means it is a relative volatility measure and that out of the money volatility has to rise dramatically to maintain a high level. With VIX in the mid 20’s SKEW over 140 is very impressive and worrisome for market bulls if the high price of out of the money SPX puts proves to be justified.

The chart below is a favorite of mine as it compares the year to date performance of VXX, SVXY, and UVXY by indexing each fund to 100 to begin the year. In the words of a pretty smart guy, Eli Mintz or @VixCentral, who commented on Twitter, “The churn has devastated SVXY and XIV”. The result of last week’s action has SVXY in line with VXX which are both down in in the mid-teens on a percentage basis for 2016.

VXX SVXY UVXY Performance

Weekend Review – VIX Futures and Options – 6/26/2016

On Thursday the world appeared to have dodged a bullet, but much like counting your chickens before the hatch, the market reacted a little too quickly and early to the assumed outcome of the EU referendum in Britain. The result was Friday which does not need to be rehashed here.

The week over week changes for VIX and the standard monthly VIX futures appear below. Things we look more dramatic if I’d use the Thursday to Friday changes to construct the chart.

VIX Curve Table

Periodically I’ll throw how the near dated futures are doing relative to spot VIX. This is as good a time as any to look at the generic week over week short term VIX futures and spot VIX changes. I’ve started to learn that a flat shape for the short term curve is close to normal. This is a good description of the 6/17 pricing below. We rarely see a defined shape, but the Friday closing prices are in a definite backwardation when comparing the next three weekly expirations to each other and spot VIX.

VIX ST Curve Table

We got list making moves from VIX last week. What I mean is we got a move that ranked highly relative to other VIX one day price changes. However, one of the moves are not exactly what people would expect.

First, the not so surprising historically significant move was Friday with VIX rising 49.33% which is the 5th biggest rise for VIX on record.   The top ten positive price changes from VIX appear in the table below.

VIX Rankings

Now on the what many people missed. Thursday VIX was down 18.52% which is the 15th biggest drop on record. The table below shows the 15 biggest drops on record for VIX including Thursday’s price action.

VIX Drop Rankings

OK, great we had some big moves. Everyone is looking for signals as to what to expect now. The trading week is on the horizon and we are all putting in overtime this weekend to prepare for what is to come. With that line of thinking I took a look at what the S&P 500 did after big moves in either direction for VIX.

First, back to the biggest rally days. Arbitrarily I looked at 5, 10, 20, and 30 day price changes for the S&P 500 after each of the big rallies in VIX. The history is sort of a mixed bag. More often than not, 30 days down the road the stock market has moved up, but there a couple of nasty drawdowns included on the table below.

SP Rankings

Now for the S&P 500 post a big drop in VIX. For the dramatic VIX drops, or the top 10 on the list below, there are a lot of red numbers. You get below the first ten and the results are a bit more positive. But again the results are a mixed bag.

SP After Drop Rankings

VIX® Index Jumps 49.3% on Friday, with Record Overnight Volume for VIX Futures – By Matt Moran

The CBOE Volatility Index® (VIX®) rose 49.3% on June 24, after the results of the Brexit referendum were announced. The VIX Index is a key measure of market expectations of near-term volatility conveyed by S&P 500® stock index option prices.

2 - VIX on June 23

FUTURES ON THE VIX INDEX

On June 24 the CBOE Futures Exchange, LLC (CFE®) announced record volume was set in VIX futures traded in non-U.S. trading hours with an estimated 235,000 contracts changing hands. The June 24 record surpasses the previous single-day record of 140,811 contracts set during the overnight session on August 24, 2015.

VIX futures now have expirations on several near-term Wednesdays. The table below shows that the VIX futures rose by more than 5.5 points for all four expirations in the next month.

3-VIX Futures June 24 close

VOLATILITY SKEW CHARTS FOR SPX INDEX AND FXB ETF OPTIONS

A key issue for some cautious investors who want to hedge is – what are the implied volatilities for various out-of-the-money (O-T-M) put options on equity securities that can be used to hedge my portfolio?

Below are Livevol skew charts for two key securities – S&P 500 (SPX) Index and FXB ETF – that show global implied volatility this morning at various strike prices and maturities. The O-T-M put options generally had much higher implied volatility than the at-the-money or in-the-money put options. CBOE  offers both Wednesday and Friday expirations on S&P 500 (SPX) options. www.cboe.com/SPX.

1. S&P 500 Skew Chart

 

2 FXB Skew

Also note that the CBOE SKEW Index recently closed at 145.70, one of its highest levels in history. www.cboe.com/SKEW.

A Quick Look at Overnight VIX Price Action

Things are moving faster than I can type this morning, but here’s a quick update and some perspective on the overnight VIX action in response to Britain voting to exit the EU. Global stock futures are lower and we all know that results in higher volatility. The curve made a pretty dramatic shift with VIX rising over 40%.

VIX ON Table

The table above only shows the monthly contracts, but it is worth noting that the VIX Weekly Futures contract expiring next Wednesday was up about 40% to 22.50 when I last checked. Finally, since we will be all about the biggest move in context, the table below shows the ten biggest one-day percent moves for VIX using the 6:30 am price for today. So far the VIX move would be the 7th biggest on record, but the day is still young.

VIX Daily Ranking

Looking back a few extra hours it is worth noting that on Thursday VIX dropped 18.52% to finish the day at 17.25.  This was actually the 15th biggest drop on record for VIX.

VIX Drop Table

Key VIX Futures Prices Jump More Than 60% By Early Friday Morning – By Matt Moran

JUNE 24, 2016 – Prices for certain futures contracts on the CBOE Volatility Index® (VIX®) rose more than 60% during the early part of the June 24 trading day, as more updates about the anticipated results of the Brexit referendum were divulged.

At around 12:45 am ET on June 24 —

(1) the VIX Weekly futures contract that expires on June 29 was up more than 75%,

(2) the VIX futures contact that expires on July 20 rose about 63%, and

(3) the reported trading volume for VIX futures during the Extended Trading Hours session already had topped 100,000 contracts.

You can check the websites http://cfe.cboe.com/ and www.cboe.com/VIX for delayed price quotes and more information.

VIX Futures June 24

Weekend Review – VIX Futures and Options – 6/19/2016

I’ve been around long enough to remember when the time in the markets between Memorial Day and Labor Day were quiet enough for traders to spend several afternoons at Wrigley field without feeling they were missing anything. This past week no one could have gotten away with playing hooky.

As the stock market came under pressure, VIX climbed to the highest levels we have seen since February. Everyone is focused on Brexit as the ‘reason’ for the markets to be doing what they are doing. I’m going to use that excuse for a couple of things in this blog as well. First, note the curve is basically in contango despite VIX being at relatively high levels. I believe, if it weren’t for the big vote next week, that either VIX would be lower or if VIX were this close to 20.00 the July contract (which doesn’t expire until July 20th) would be at a discount to spot VIX.

VIX Curve table

I noted in a tweet that for the first time in four years more VIX put options than call options traded for two consecutive days (Thursday and Friday). My initial impression was that this must be a sign traders are prepping for a volatility crush after the Brexit vote or at least lower VIX over the next few weeks. Well, I may have jumped the gun without all the information. The picture below shows a breakdown of today’s VIX option trading.

VIX Stats

Note what I highlighted above, a good portion of the VIX put volume today was on the bid side. This usually indicates public orders being more sell oriented than buy oriented. If puts were being sold, it would be with the expectation of higher volatility. Also, VVIX has been very high of late, closing Friday at 115.72 which is on the historically high end and may have steered volatility bulls toward selling puts instead of buying calls.

Finally, a little more on Brexit. I took a snapshot from the LiveVol platform at the end of the day and cut out the skew chart for all the available VIX option series. Note the highest line below represents the June 29th VIX options which is the first expiration post-Brexit.

End of Day Skew

At this time, it appears the Brexit versus Bremain vote is going to come down to the wire. We know the vote is going to happen we just don’t know the probable outcome and don’t know how the market will react. With that much uncertainty we have high VIX, high VIX futures pricing, and high skew for the June 29th VIX options.

Weekend Review – Volatility Indexes and ETPs – 6/19/2016

The VXST – VIX – VXV – VXMT curve moved from contango to an unusual shape this past week. Lots of things point to the markets being concerned about next week’s ‘should I stay or should I go’ vote in Britain. VXST represents short term SPX option volatility and the options that expire just after the vote are feeding that calculation.  I’m going to say results in VXST finishing the week at such an elevated level last week have a little to do with Brexit.

VXST - VIX - VXV - VXMT

With the big move up in volatility last week, VXX and UVXY both had a good time respectively rising about 8% and 15%. On the flip side of the equation SVXY gave up most of the 2016 gains losing about 10%. I also would like to highlight TYVIX which closed much higher, even though the Fed announcement is behind us. I guess this vote is causing concern across all financial markets. Finally, I would be remiss without noting that VVIX finished the week just over 115.

VXX Table

As mentioned, SVXY took it on the chin last week, but is still slightly in the green for 2016. Both VXX and UVXY had good weeks, but need a few more good weeks just to get back to even on the year.

SVXY VXX UVXY PERF

One trader appears to be looking for volatility to move lower next week and expressed this opinion through selling a put spread on SVXY. Remember SVXY is the inverse of VXX on a daily basis so if VIX futures move lower next week then SVXY will benefit. With SVXY at 52.05 the trader sold the SVXY Jun 24th 44.50 Put for 1.01 and then purchased the SVXY 39.00 Put for 0.46 and a net credit of 0.55.

SVXY PO

Note the short strike in this put spread is down about 17% from where SVXY was trading when the spread was initiated. Seeing that got me to do some digging. SVXY has been around since 2011 and we have 245 weekly observations. Of those 245 weeks, only 9 weeks have experienced a drop of 17% or more. Taking things a step further I decided to check into how often SVXY has lost enough value to hit the long strike on this put spread. That would involve a drop of about 33% and it has never happened (not saying it can’t, it just hasn’t) as the biggest one week drop for SVXY since inception is just under 26%.

Records for VIX Futures and for SPXW Wednesday Expirations – by Matt Moran

Below are updates on (1) VIX futures, (2) SPXW Wednesday-Expiring Weekly options, and (3) the BPVIX Index.

(1.) RECORD OPEN INTEREST. Futures on the CBOE Volatility Index® (VIX®), which launched in 2004, experienced some milestones regarding open interest in recent days –

  • VIX futures open interest surpassed 500,000 for the first time on June 6;
  • VIX Futures open interest hit a new all-time record high of 501,835 on June 7. www.cboe.com/VIX.

1 - VIX futuresrecord open interest

(2.)  RECORD VOLUME. On February 23, 2016, CBOE launched trading of weekly options on the S&P 500® Index which expire on Wednesdays. The average daily volume for SPXW Wednesday-Expiring Weekly options grew to a record 74,114 in May, and then to 105,768 so far this month (through June 14).  www.cboe.com/SPXW.

1 - Wed Exp Weekly volume

CBOE’s February press release noted –

“We are pleased to further expand our SPX product complex with the introduction of SPX Weeklys with Wednesday expirations,” said CBOE Holdings CEO Edward T. Tilly. “Wednesday Weeklys, in addition to end-of-the-week expirations, will increase opportunities to trade SPX and enable investors to better target specific expirations. Wednesday Weeklys will align with VIX Weeklys futures and options, which also expire on Wednesdays, to provide greater trading flexibility for the increasing number of customers who use both our SPX and VIX product suites.”

(3.)  BPVIX RISES 322% IN 2016 (Y-T-D) ON BREXIT CONCERNS

The CBOE/CME FX British Pound Volatility Index (BPVIX) rose around 322% year-to-date (through June 16). Much of the rise in the index has been attributed to anxiety re the possible impact of the Brexit in/out referendum on June 23.

3 - Volatility indexes BPVIX VIX

For more information on volatility indexes, and on VIX futures and options, please visit www.cboe.com/volatility.

Bullish VIX Block Trade

June VIX futures and options settle Wednesday on the open so we are starting to see traders look ahead to July standard expiration. Of course those that want to be more strategic can explore the VIX Weeklys, but that is an argument for another blog.

Thursday morning, exactly an hour into the trading day there was a buyer of 8,500 VIX Jul 17 Calls at 1.99 who then sold 17,000 VIX Jul 21 Calls for 1.03 each and a net credit of 0.07 per spread. The result is a small credit and a payoff at July expiration that looks like the diagram below.

VIX PO

As highlighted on the chart VIX was at 14.71 and the July futures were trading at 17.20 when this trade was executed. Odds are a spike in VIX over the next few weeks would result in our trader getting out of the spread with some sort of profit or altering the composition on the trade. However, if held to expiration all is well all the way up to just above 25.00 (25.07 to be exact) with a best case scenario of VIX settlement at exactly 21.00.

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