Gold and Oil Volatility Last Week – 7/20/2014

The price of oil rose a bit in conjunction with the flare ups in the geopolitical situation this past week. However, oil had backed off from 2014 highs a few weeks ago and did not come close to surpassing those levels despite some real fear that showed up in the stock market. This resulted in OVX moving up on Thursday, but not nearly to the extent of equity market volatility.


Gold also moved higher as would be expected when there is uncertainty that involves armed conflict. However, like oil, gold didn’t break out to new highs. In fact the move higher for GLD actually resulted in the price moving back into the middle of support and resistance.


The underlying markets have a little in common, but the weekly curve changes tell two different stories. GVZ shifted higher in the type of manner that raises a warning that a bigger price move that has been experienced over the past few weeks may be on the horizon. With respect to oil, the volatility futures seem to be indicating low expectations of any big price moves in the near term.


VXST Last Week – 7/20/2014

On Thursday VXST ran up from 10.26 to 16.23. I’ll catch some flak for this next sentence, but I’m pretty much resigned to always getting flak as long as I talk publicly about volatility markets. That means the CBOE Short-Term Volatility Index was up just over 58% which was the fourth biggest move (on a percentage basis) based on the history for VXST that CBOE has compiled going back to January 2011. I know there’s an argument to not discuss volatility index changes in the context of percentages, but I think of them as index points and if we talk about the S&P 500 changes in percentage we should do the same for volatility indexes. VXST PA The curve had quite a move over the 48 hour period covering Thursday and Friday of last week. I included the closing prices on Thursday since I think it sheds a bit more light on exactly what sort of short term move up (and down) we got in VXST and VXST futures last week. VXST   Finally, VXST option trading continues to see increasing volume. Friday about 5,000 VXST options changed hands with big volume in the VXST Jul 23rd 18, 20, and 22 Calls.

Russell 2000 and Nasdaq-100 Volatility Last Week – 7/20/2014

Despite some interesting market movements last week VXN was down slightly. We can combine Friday’s market rebound from the latest one day crisis that occurred on Thursday along with INTC, EBAY, and GOOGL getting their earnings out of the way. I did notice that some big Nasdaq-100 components report next week (AAPL, AMGN, AMZN, and GOOGL) so I would have expected VXN to be a little bit higher going into those numbers, it could be VXN is telling us not to expect many fireworks over the rest of the second quarter earnings season – at least not from tech and biotech companies.



The Russell 2000 continues to underperform the S&P 500 in 2014 and RVX has been at quite a premium relative to VIX.  Since RVX was already a bit elevated we didn’t see quite the move from small cap volatility as we did from VIX on Thursday. However RVX did tick up slightly on a week over week basis.


This past year the Russell 2000 has underperformed the S&P 500.  This is normal, and a little expected, since there was some strong outperformance in 2013. I spend part of last week at Russell Investments in New York and while I was there on Wednesday the relative spread between RVX and VIX reached the highest level in over 8 years. The table below shows the spread as the difference between RVX and VIX divided by VIX. This spread hit over 71% Wednesday and then abruptly backed off on Thursday.

In the past when geopolitical risk pushes volatility higher it has resulted in VIX climbing faster than RVX (and VXN for that matter). The relative spread between RVX and VIX closed at 71.09% on Wednesday and quickly dropped to 43.05% as VIX climbed more dramatically than RVX as equity markets sold off. As the financial markets brushed off Thursday’s scare the spread widened back to 56.88% to finish the week. The history of the difference between RVX and VIX along with the relative performance of the S&P 500 and Russell 2000 (as measured by the Russell 2000 minus the S&P 500) shows up in the table below.

RUT - SPX Relative Performance

Finally on a week over week basis the curves didn’t do much at all. Wednesday was settlement for the July VXN and RVX contracts and now August is the front month.


Volatility Indexes and ETPs Last Week – 7/20/2014

The week over week curve changes do not even come close to doing this past week’s volatility index action any justice. I got out my back up spreadsheet that allows me to plot three lines. The result is below. Note the purple line showing the short lived volatility event from Thursday. The pattern of a spike followed by a drop continues.



The same thing may be said for the weekly ETP performance. Just as an example VXX closed Friday at 29.93 which would have placed the fund up 5.76% for the week. Instead, as seen below, VXX gave back 1.45% last week.

Options ETNs

With the move higher in volatility there was a lot of activity in VIX futures, options, and the ETPs as well on Thursday. The habit has been selling volatility on any move higher and that’s what I caught a glimpse of Thursday morning as someone bought a put spread with only a day left until expiration. Around 10:30 Chicago time there was a buyer of 12,000 VXX Jul 18th 28 Puts for 0.40 that also sold 12,000 VXX Jul 18th 0.04 and a net cost of 0.36. It is rare that I get to talk about a trade in this space and discuss the conclusion as well as the entry. However, as these were options that expired this past Friday I can at least note that VXX closed at 27.89 so the spread had a value of 0.11 if held through expiration. I’m doubtful that is the case, but if so someone will be short 1,200,000 shares of VXX come Monday morning. Either way a payout diagram for this one day trade showing VXX at 28.05 at 10:30 on Thursday, which was when this trade went off, and Friday’s close of 27.89 appears below.

VXX Put Spread

Volatility Index Reactions to Thursday’s Market Action

The cool weather has been making it feel like summer is ending and the markets acted like it as well. History tells us that September and October are treacherous months for the stock market and like the cool weather we got a swoon in the S&P 500 today. The result was fairly decent moves in VXST, VIX, and VXEEM when compared to historical spikes. The table below covers all the tradable volatility indexes, their performance today, where the percent change ranks relative to history, and what the record moves have been for each index.

VIX Table

Upon first glance the difference between RVX and VIX stands out. I’ve noticed in the past when we have events that result in macro concerns VIX tends to rise more than either VXN or RVX. We definitely witnessed that today. The tame moves in GVZ and OVX were a bit surprising as well, the Russia – Ukraine situation has influenced oil in the past so I kind of was perplexed by those to volatility indexes not putting up a bigger gain. Finally, the difference between VXEEM and VXEWZ stands out as well, but VXEWZ has been at a significant premium relative to all the other equity market volatility indexes in 2014, despite the Brazilian market being fairly strong. With a much higher price to start the day it was to be expected that the percent change on the day would lag the other market oriented indexes.

So is today the beginning of the elevated volatility we have been waiting for?  Only time will tell.

VIX Rose 32% on Thursday, as VIX Futures Now Offered Round-the-Clock – By Matt Moran

On Thursday the world experienced unsettling news as a plane was shot down in Ukraine, and there was violence in the Gaza Strip. There continues to be strong futures and options trading activity related to the recent rise in volatility indexes at CBOE. Long futures and long call options positions in volatility indexes are used as catastrophe hedges by some investors.

The CBOE Volatility Index® (VIX®) rose 32% on Thursday, with estimated volume for VIX options hitting a 1.149 million contracts, and estimated volume for VIX futures topping 383,000 contracts.

The CBOE Short-term Volatility Index (VXST) rose 58% on Thursday, with estimated volume for VXST options reaching 3,450 contracts.

EXTENDED TRADING HOURS (ETH). VIX futures now are offered almost 24 hours a day, 5 days a week. The trading week for VIX futures begins each Sunday at 5:00 p.m. CT and ends on Friday at 3:15 p.m. CT. CFE will close for 15 minutes between 3:15 p.m. CT and 3:30 p.m. CT, Monday through Thursday, after which the next trading day will begin at 3:30 p.m. CT.

Trading volume for VIX futures early in the Friday ETH time period (from 4:30 a.m. to 1:00 p.m. Hong Kong time) was estimated at more than 13,000 contracts.

For trading, hedging, and investing ideas please visit this link — VIX TRADING STRATEGIES.

VXST July 17

Why is the VIX so high?

No, our crack proofreading team didn’t muff the headline.  After several weeks of seemingly unanimous commentary about how investor complacency has resulted in VIX® levels that are “too low,” we want to ask the contrarian question.  Rather than being too low, why is the VIX so high?

The question is germane because there has been hardly any volatility in the S&P 500®. Realized volatility has been running at roughly 6%-7% annualized. And although the VIX is a measure of implied, or anticipated, rather than actual, volatility – it still ought somehow to be anchored in realized volatility data.

The VIX is currently much, much higher than realized volatility – at around 11.5 as we write.  One interpretation of this is that the market “expects” next month’s volatility to be nearly double what we’ve seen recently. Moreover, the futures market is pricing in an expected gain in the VIX to around 17 by March 2015 — nearly triple the current level of realized volatility.  Two questions naturally emerge:

  1. Does the market really expect a doubling or tripling of volatility?  Otherwise said, is the VIX “worried” about something that the equity market hasn’t noticed yet?
  2. Can I make money from this?

The first question relates to the information that the VIX ultimately conveys. To simplify, suppose two types of events can affect the equity markets: i) day to day economic or company-specific news driving the cut-and-thrust of market flows and ii) extraordinary events – sometimes called tail risks – which might (or might not) be financial in nature (a major earthquake, for example).

Total risk is of course a combination of events of type i) and type ii) and everything in between.  It happens to be the case that recent data comprise a steady trickle of the former and none of the latter. But lower risk of the first type does not necessarily imply lower risk of the second type. To use a geological analogy: there were no earthquakes in California last month (i.e. no short-term volatility), but the probability of a major temblor along the San Andreas fault (i.e. a tail event) has not gone down. This is somewhat intuitive: the average institutional investor may be reassured by Yellen’s so-far steady chairmanship or the overall macroeconomic outlook, but the tail risk gods are supremely indifferent.

As a consequence, a high proportion of the risk in equity markets currently is accounted for by the possibility of tail events (a phenomenon manifest in so-called “skew”).  In other words, a VIX several points higher than realized volatility is consistent with a market expectation of continuing similar volatility unless something surprising happens. The mere possibility of tail events – invisible in current equity valuations – provides the VIX with a different perspective, evoking Michel de Montaigne:

 “My life has been full of terrible misfortunes most of which never happened.”

Turning to opportunity for profit: the key judgement relates to whether the likelihood of an extreme event is overpriced.  Selling S&P 500 put and/or call options can realize a profit if volatility proves less than expected, as can taking short positions in either VIX futures or in related exchange-traded products. Indeed, such strategies are popular ways to capture any “premium” to the VIX systematically. However, the risks of such strategies are far from symmetric: if the VIX were to remain roughly where it is for the next month, a short position in the July 2014 VIX future stands to make a 6% return. On the other hand, the occurrence of a tail event could quite conceivably send the VIX towards the top of its historical range. The losses on a short position during such a scenario would then be several multiples of the notional amount invested.

Even when profit is possible, or highly likely, dramatic risks remain. Selling volatility remains a strategy exclusive to the courageous.  Perhaps that is one reason why the VIX is so high.

VIX Last Week – 7/6/2014

VIX finished the week at a post 2008 low which can be attributed to a bullish reaction to the June jobs number and an extra-long weekend.



After attributing for a guesstimate of the impact of the extra days off on spot VIX I wonder if the July VIX contract is a bit overdone to the downside. There are seven trading days remaining until July settlement on the 16th and you never know what can happen in the markets. One itchy trigger finger in Ukraine or Iraq could quickly escalate into something that pushes VIX at least back into the low teens.


Finally, I always like to highlight interesting trades in this blog. Almost all the VIX option trades I show are to the bullish side. In fact they are generally cheap methods of having exposure to a spike in volatility. Well one of the last big spread trades on Thursday was actually bearish. Someone came in and bought over 6,000 VIX Jul 11.00 Puts at 0.18 and sold the same number of VIX Jul 10.50 Puts for 0.05 and a net cost of 0.13. The best case is for VIX to be under 10.50 at July expiration which would result in a profit of 0.37.


Gold and Oil Volatility Last Week – 7/6/2014

The United States Oil (USO – 38.25) ETF was lower last week as the geopolitical risk in the price of oil seems to be subsiding. We saw OVX rally a few weeks ago when the price of oil moved higher based on increased tension in the Middle East. Now the price of oil starts to trend lower and again we see OVX move lower as well. Commodity oriented volatility moves based the magnitude and direction of the price move in the underlying and 2014 has been giving some textbook examples of this behavior in 2014.


The SPDR Gold Shares (GLD – 127.16) fund rose slightly last week and so did GVZ.   The price of gold has been very range bound this year and GVZ has reacted to the lackluster price action by trading at historically low levels. However, GVZ did pop up a little last week, which got my attention since we had a long weekend and GLD was very range bound. Broad based volatility measures, like GVZ, usually react to what is going on in the underlying market, but do at times show a little anticipation.


The chart below is a weekly price chart for GLD in 2014. I have highlighted the 120.00 and 130.00 price levels as that seems to generally be where GLD has been content to trade in 2014. If GVZ moved up a little last week then a breakout or breakdown in price might be anticipated by the GLD option market.

Gold Chart 07032014

The price curves for OVX and GVZ tell a couple of different stories. In the case of OVX the drop in July that accompanied last week’s drop in OVX kind of confirms a lack of concern regarding what is going on in Iraq or Syria these days.  GVZ rose and the July contract rose as well. In addition to July moving higher it also gained relative to the August contract. That ‘bump’ I see in the curve makes me wonder exactly what the gold market is anticipating in the near term.


Russell 2000 and Nasdaq 100 Volatility Last Week – 7/6/2014

Both the Russell 2000 and Nasdaq-100 had strong weeks last week respectively rising over 1.5% and 2.0%. This compares to a 1.25% gain for the S&P 500. Despite their underlying markets outperforming the S&P 500, both VXN and RVX did not drop as much as VIX for the short week. I always believe there is a ‘why’ when this sort of thing happens and I have different theories on the whys for each. In the case of VXN, we are coming up on earnings season which results in an increase in the implied volatility of options on individual stocks. When you have an index like the NDX where 10% of the stocks represent almost 50% of the price action in the index you would expect to see implied volatility stay a little elevated and that may be why VXN was down about 5.5% last week while VIX lost over 8%.



The RVX story is a little different, but has been repeated in this space almost weekly for most of 2014. Despite the strong week, the Russell 2000 is still underperforming the other broad based market indexes this year. RVX dropped 0.50 or 3% last week even though the underlying market was much higher.


Looking at the curves, everything moved in sync. However, take a close look as the little bump for the VXN July futures relative to the shape of the RVX curve. I’m attributing the ‘bump’ to earnings which will be the daily headline starting in a little over a week and last into the end of July.



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