CBOE Short-Term Volatility Index Last Week – 8/3/2014

VXST spiked higher on Thursday and remained at elevated levels to end the week up just over 60%. At the height of people hitting the panic button on Thursday VXST rose to 19.99. On Friday, when a second leg down in the S&P 500 appeared to be on the horizon, VXST managed to climb into the 20’s for the first time since the Friday before Ukrainian elections back in March of this year.

VXST PA

 

A lot of what I see this weekend in the volatility space indicates near term there is an expectation that the S&P 500 may try to recover to higher levels, but some longer term concerns. Checking the closing term structure on Friday the near future contract closing at about a 1.50 discount to the index shows near term volatility traders pointing to the S&P 500 at minimum not following through much more from this past week’s price action.

VXST

Volatility Indexes and ETPs Last Week – 8/3/2014

After checking in on the four S&P 500 oriented volatility indexes I realized part of what I see is expected and the other part is a little worrisome. VXST was up just over 60% last week. I love how I type that and move on. Any other market has a 60% move and there is a CNBC special about it. VXST finished the week at about a 2 point premium to VIX and this is fairly normal considering the S&P 500 was down 2.69%. What makes me pause is the farther end of the curve where 3 month and 6 month S&P 500 implied volatility is pretty much in line with 30 day IV. It makes me wonder if consistently higher volatility is on the horizon.

VXST VIX VXV VXMT

 

The long oriented ETNs were higher, as would be expected. VXX is now about half August and half September futures (actually a little more September). Those markets are at a discount to VIX, so the long oriented ETNs could benefit if VIX just remains in the upper teens.  One other thing I would like to point out on the table below is VVIX topping 100.00.  That use to be the mid range for VVIX, now it is a level that represents the top end.

Indexes ETNs

Before all the hub bub on Thursday I there was a bearish spread trade on VXX that caught my eye. Wednesday morning, shortly after the open, a trader came in and sold 17,500 VXX Aug 29th 30 Calls at 1.32 and bought 17,500 VXX Aug 29th 33 Calls for 0.80. The result was a net credit of 0.52. This trade is a pretty common one as many of us are blindly conditioned to put on short positions on VXX which was trading around 28.30 when this bear call spread was initiated.

VXX PO

Despite negative issues that are constantly bantered about regarding VXX, it does do what it is supposed to do when it is supposed to do it. What I mean by that is when we get an increase in expected market volatility VXX moves higher. In fact from Wednesday’s open to Friday’s close VXX was up by just over 16% finishing the week at 33.01. There is still time for VXX to come back down to the 20’s before the last Friday in August, but things could be much worse for the seller of the VXX Aug 29th 30 Calls if they had not chosen to buy the VXX Aug 29th 33 Calls.

Nasdaq-100 and Russell 2000 Volatility Last Week – 8/3/2014

VXN rose just under 30% last week, admittedly off a low base, but still that is quite a move. This rise in VXN was slightly less than VIX’s one week change of over 35% which may be attributed to a combination of the concerns weighing on the equity market being somewhat global in nature and the Nasdaq-100 dropping a little less than the S&P 500.

VXN PA

The Russell 2000 has been a laggard this year and is now down more than 4% on the year. The CBOE Russell 2000 Volatility Index (RVX) has reflected this lack of performance by consistently trading at a premium relative to VIX. The premium narrowed a bit last week with RVX rising less than 20%.

RVX PA

Before moving on to the curves I would like to note a trade highlighted in this blog space before the market dropped last week. Someone, in a very timely fashion, purchased 2,200 of the RUT Oct 1010 Puts for 9.50. The reason I bring this up in a space discussing volatility is the benefit that trader got from the move up in the implied volatility of RUT options combined with some price appreciation that came from the drop in the Russell 2000. Late Friday the bid price for the RUT Oct 1010 Put was 14.00. This is a great demonstration of why paying attention to equity index implied volatility and understanding how it changes relative to the underlying market is important for traders that may only focus on index options.

The blog about the RUT trade from earlier this week may be found at the following link –

http://www.cboeoptionshub.com/2014/07/30/bearish-rut-trade-yesterday/

The curves are both basically mirror images of each other. Both the indexes are at slight premiums to the front month future and then a slight amount of contango beyond the August futures. Friday saw a bit of a catch up for the futures as there was not rebound in the stock market after Thursday’s big drop.

VXN RVX Curves

Emerging Market Volatility Last Week – 8/3/2014

Like many equity market volatility indexes VXEEM has been at historically low levels for most of 2014. Eventually this sort of price action must revert to a mean that is higher and often this involves surpassing that average. VXEEM did just that finishing the week up over 25%.

VXEEM PA

 

Since some of the problems that took the markets down stemmed from an emerging market that was not Brazil, VXEWZ rose only (only?) 16% last week, much less than the 25% move out of VXEEM from last week. Also, the Brazilian market has held up better than the other emerging markets in 2014, it the EWZ ETF did experience a 4.5% drop last week.

VXEWZ PA

The curves have a bit of a different look to them. VXEEM finished the week higher than the front month future while VXEWZ was at a discount. The discount is probably a function of VXEWZ being at a premium relative to VXEEM and anticipating more risk than VXEEM this year.

VXEEM VXEWZ

VIX Action Today – 7/31/2014

Today was a heck of a day in the equity markets. We got our biggest on day S&P 500 drop in a few months and the first down month for the S&P 500 since January (I bet you forgot the January Effect indicator was bearish for 2014 – I admit I did). The result was a spike in VIX, VXST, and moves higher in all other equity market related volatility indexes. Here are a few of the highlights (or low points depending on you were positioned coming into the day).

The CBOE Volatility Index –

VIX moved up over 27% which was the third biggest move to the upside in 2014. The front month future was up just over 12% and finished the day at a discount of 1.75 points to the spot index. If you throw spot VIX out of the equation, the term structure chart is actually in contango, which could be taken as a bullish signal for the equity market. The market has become conditioned to expect any spike in volatility to be short lived and that is apparent when you look at the blue line below, of course excluding spot VIX. A couple of weeks ago VIX moved up by over 30% in a single day, but was back down below 12 in less than a week. That is the sort of pattern that traders have come to expect and may explain the August discount to spot. Keep in mind we have an employment report tomorrow that probably has some market participants nervous. Looking at the August VIX future price today I would say those that are nervous into tomorrow’s number are in the minority.

VIX Curve 

Unofficially, today’s VIX futures volume came in at 364,811 contracts which would make today the sixth busiest day on record for VIX futures trading. Also, unofficially, it appears that the average daily VIX futures volume for July was just over 196,000 contracts which would make July the fourth busiest month for VIX futures trading based on that metric.

The CBOE Short Term Volatility Index –

VXST was up almost 50% on the day for the ninth biggest single day move since the data was complied. The August 6th VXST future was up over 26%. With only three trading days remaining until expiration the August 6th contract followed VXST higher, but is still at somewhat of a discount. Like with the VIX curve, there seems to be some apprehension as to whether this move down in the stock market is going to continue.

VXST Curve

VXST – VIX – VXV – VXMT Term Structure

Finally, taking a look at expectations going out six months the VXST – VIX – VXV – VXMT curve tells a bit of a longer term bearish story. VXST is at a premium to VIX, but VXV and VXMT (3 month and 6 month volatility measures) both moved up.

VXST VIX VXV VXMT - Fixed

What I read from the three term structure charts above is that the market expects another rebound, but is uncertain about the longer-term let’s say six months or so outlook for the direction of stocks. That is in no way a prediction, just how I read the volatility environment as of the close today.

With so much activity going on I decided to visit the VIX pit just after the 3:15 close and ask if there was a balance of bearish and bullish VIX trades or was the sentiment all in one direction. The response was it seemed to be bullish on VIX early, bearish mid-day, and then bullish again to finish the day. The chart below shows the price action from today, and it is interesting that the one minute VIX price action sort of matches up to the more subjective response I received from guys in the VIX pit.

VIX Intraday Fixed

Bullish VIX Trade (bearish on stocks)

Someone is looking for a protracted move higher in volatility and expressed this by purchasing 90,000 VIX Nov 21 – 30 Call Spreads for between 0.75 and 0.80 today. The payoff diagram below shows the payoff at November expiration. However, a trade of this size (over $7,000,000) is most likely part of a hedging program for a much larger portfolio and would be scaled out of or traded around before November expiration.

VIX BC Spread

Bearish VIX Trade (bullish on stocks)

There was a buyer about mid-day of VIX August 12.50 Puts that paid 0.30. Needless to say this trade was a little early as VIX had another leg up in the last couple of hours today.

VIX Put Trade

So that is the day that was volatility trading. As I finish this blog I look down and it is exactly 7:30 pm Chicago time. In 12 hours we will have a fresh employment report from the Labor Department. I for one think tomorrow could be pretty pivotal. It has been a long time since we saw a dip in the stock market that was not followed by a rebound. The market seems to be prepared for that rebound to occur very soon. An employment report that is taken negatively by stocks may just give us the first taste of the stock market not shaking off a bad day in a very long time.

VXST Futures and VIX Index Both Rose More Than 26% Today – By Matt Moran

July 31, 2014 — In a July 26 piece that now looks as if it could be rather prescient, in last weekend’s Barron’s Striking Price Column, Steve Sears wrote –

“BlackRock, the world’s largest asset-management firm, is telling clients that equity-options volatility is now the last cheap asset class in the financial market. With the CBOE Volatility Index (VIX) at about 11.50, around half of its long-term average of 19, BlackRock is telling clients that the measure should be in the mid- to high-teens. This view is consistent with our previous recommendations that investors buy volatility in anticipation of VIX increases in reaction to shifting Federal Reserve monetary policy or continuing geopolitical instability in Ukraine and the Middle East. …”

CHART SHOWING SIX TRADING DAYS

The chart below shows that the VIX spot Index and VXST futures (expiring on Aug. 6) both moved pretty closely in tandem.

VXST chart for Blog

TABLE WITH 26 VOLATILITY INDEXES
The table below shows today’s price moves for CBOE’s 26 volatility indexes and the near-term VXST futures. Both the VIX spot index and the VXST August Week 1 futures (that settle on August 6) rose more than 26% today. To learn more about futures and options on several volatility indexes, please visit www.cboe.com/volatility.

Table for July 31 Blog

VIX Last Week – 7/27/2014

VIX rose over 5% last week despite the S&P 500 being basically flat on the week. There could be some of that anticipation we see in VIX (as opposed to reacting to the market) in front of big economic events and this coming week is full of those events. The FOMC rate announcement comes out Wednesday and Friday before the equity market opens we will get the first read on the economy in July when the Labor Department releases the monthly jobs report.

VIX PA

 

The VIX curve isn’t terribly steep with the August contract only at a 0.81 premium as of Friday’s close. I would have expected a bit more based on the potential for a spike in VIX this coming week.

VIX

Based on this coming week I took a peak at Friday’s VIX option activity. The first thing I noticed was it was sort of quiet, but the other thing that stood out a bit were two trades that occurred after lunch. Someone bought 4,000 of the VIX Aug 20 Calls at 0.24 and then a little later there was a buyer of over 7,500 of the VIX Aug 23 Calls for 0.15.

Last Week in Volatility Indexes and ETPs – 7/27/2014

I’m still getting back up to speed after a brief break from the markets last week. One of the first things I want to do Monday morning is get a handle on VXST versus the other S&P 500 oriented volatility indexes. The curve shift below has me stretching for a reason VXST would drop while the other indexes rose. Especially in front of a jam packed news week like we have coming up.

VXST VIX VXV VXMT Curve

 

VIX and VIX futures rose last week and the residual effect was a bounce for VXX and the other long VIX oriented ETPs. As a quick heads up VXX is close to 1/3rd September and 2/3rds August VIX futures going into the week. We are already approaching the period of time where September VIX futures will be the dominate weighting in the strategy.

Options ETNs

Although physically far away, I was still keeping an eye on block volatility trades last week. A VXX option trade from Thursday has me intrigued. Someone bought 20,000 VXX Aug 25 Puts for 0.17 and sold 20,000 VXX Aug 28 Puts for 1.45 for a net credit of 1.28. I get that, over 28.00 and the 1.28 credit is a profit. However, as part of the same spread trade they bought 10,000 of the VXX Sep 26 Puts for a cost of 1.34. So the hope is a bounce in VXX that keeps the ETP over 28.00 at August expiration and then a tame equity market that will see VXX well below 26.00 on the third Friday in September.

Emerging Market Volatility Last Week – 7/27/2014

The state of emerging markets is strong. EEM rose 1.4% last week and is up just a tad under 8% for 2014. After the underlying market put up a strong week VXEEM made a surprising move and rose over 5% – I’ll attribute this move up to the index already being pretty low and a couple of economic events coming out next week in the US that could result in extra volatility for all equity markets.

VXEEM PA

 

If EEM is strong, then EWZ is the champ! The Brazilian ETF rose over 1.5% last week which puts the total return for 2014 at 16.55%.   Monday EWZ rose and VXEWZ experienced a spike, but by the end of the week VXEWZ had given up all of Monday’s gains. It appears, much to the chagrin of pundits, that Brazil is much more than just soccer.

VXEWZ PA

The VXEEM curve is shifted in a parallel fashion, with the index being followed higher by the actively traded futures. VXEWZ twisted a bit, with a lower index and August future, but a tad higher closes for September and October. The steepness of the curve makes me wonder if EWZ is going to be able to maintain its ‘champ status’ through the end of the year.

VXEEM VXEWZ

VXST Last Week – 7/27/2014

I like being surprised and perplexed when I look at the week over week changes in volatility indexes. What has me really scratching my head is the difference between VXST and VIX. VXST was down slightly last week while VIX rose over 5%. That’s where I start to wonder what is up. I could understand VIX up slightly and VXST down a little (or vice versa) based on the S&P 500 being hardly changed last week. However, we got some news on the horizon with an FOMC announcement Wednesday and the July employment number out before the market opens on Friday. If I knew VIX and VXST were going to diverge last week I would have guessed VXST would have been higher and VIX would have been down from Friday to Friday.

VXST PA

 

Continuing on with the VXST observations, the futures curve finished the week displaying a very ‘normal’ shape. Again I’ll refer to next week’s big economic news. I would expect the August 6th future to stand out a bit on the upside relative to the other contracts. Maybe it is too early and that shift will occur Monday or Tuesday, but since VXST futures trading is still relatively new, what is normal or to be expected from the curve price changes is a work in progress.

VXST

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