Volatility Indexes and ETPs Last Week – 10/26/2014

The S&P 500 put up the biggest gain in almost two years last week. This put a little pressure on volatility indexes that are based on S&P 500 index option pricing.   Saying a little pressure is just being modest. The term structure change below is about as dramatic as it gets for a one week move to the downside.


I did not have to look too far down the performance table to see a red flag with respect to the equity market performance.   The implied volatility of VIX options remains high despite the drop in VIX. This means there is still some demand for protection against and equity market drop a subsequent spike in volatility or VIX.   VVIX finished out the week over 104 well above the 2014 average of 80.

VVIX Daily Chart

The long volatility oriented ETPs such as VXX took quite a dive while the short funds recovered from their recent dramatic drop.   VXX managed to rise 30% over the past few weeks and offered a nice short term return as the stock market was under pressure, but quickly gave a good portion of that performance back with the stock market showing strength this week.

Index and ETPs Space

The VIX Takes a Hairpin Turn

I have a neighbor who is cooler than me. He is braver than me. He also has more expansive and expensive medical and auto insurance than I do. How do I know all this? Well, he races street motorcycles.

The other day I asked him what was the fastest he had ever gone. His answer: “Very fast, but that’s not where the thrill is. The adrenaline rush comes from handling and powering through the curves.”

The movements in the CBOE Volatility Index (VIX) the past few weeks have made me reflect on this conversation. We know the VIX’s approximate top speed — somewhere around 80 — but it’s the changes in direction, the twists and turns, which test your skill.

Recently, the VIX took investors on a treacherous hairpin turn. It looked like this:

VIX Price

Did you get thrown off your motorcycle? It seems that many investors handled this deftly, seeing this jump in the VIX as a wicked but ultimately short-term movement. We know this by the performance of the VIX futures market.

VIX Futures in Times of Big Crises
First, to get some context, let’s look at the behavior of the VIX futures during the standard for all recent crises, the 2008 meltdown. In that time, when the whole market went to heck, the VIX shot up and the futures term structure went into backwardation across all maturities.


The VIX futures term structure assumed a similar shape during the standoff over the government debt ceiling in 2011.


The Hairpin Turn
Now let’s see what happened during the recent shakes and tremors in the market. The term structure shifted up and developed a kink around the second and third months, after which the rest of the term structure remained upward sloping, in contango. The shift up indicated that investors expected greater volatility across all periods, but the kink showed that they didn’t necessarily expect the very high levels the VIX had reached to persist.


Over the next few days, investors became even less worried about high volatility in the S&P 500 continuing. The VIX futures curve shifted downward and adjusted back into its most typical shape, which is contango across all maturities.


The investors betting on volatility subsiding to a degree have turned out to be right, at least for now. But there will undoubtedly be more turns on the way – both hairpin and more traditional curves – to test their driving skills.

VXEWZ Index at All-time High of 72.83 As Brazilian Election Nears – By Matt Moran

Oct. 20, 2014 – Today’s closing price was an all-time daily closing high of 72.83 for the CBOE Brazil ETF Volatility Index (VXEWZ), which reflects the implied volatility of the EWZ ETF.


Futures and options on the VXEWZ Index provide investors with tools to manage exposure to Brazil, the EWZ ETF, and related volatility.

A story today at wsj.com provided these comments about the upcoming election in Brazil —

“President Dilma Rousseff of the leftist Workers Party, or PT, is the preferred candidate of millions of Brazilians who’ve been lifted from poverty thanks to the PT’s social programs. Challenging the incumbent is Aécio Neves, whose Brazilian Social Democracy Party in the 1990s killed hyperinflation and privatized large swaths of the economy. Mr. Neves has pledged to use more austere economic policies to tame Brazil’s sticky inflation and jump-start growth after the nation fell into recession this year. The two are basically tied in the polls just six days ahead of the Oct. 26 vote … “

A story at ETFtrends.com noted that –

“ ‘Weakening foreign demand and a severe, double-digit contraction of business fixed investment may have plunged the Brazilian economy into a technical recession,’ said S&P Capital IQ in a recent research note. The inflation dimension of Brazil’s economic troubles remains particularly thorny …”

The EWZ ETF charts below show a 5-year price chart, and a change in the volatility skew for EWZ this month.

EWZEWZ vol skew

For more information on managing volatility and the 26 volatility indexes at CBOE, please visit www.cboe.com/volatility.

VIX Last Week – October 19, 2014

At the worst point last week the S&P 500 was down 9.5% from the closing high of 2011.36 on September 18th and down about 4.5% from last Friday’s close. By Friday we came back to less frightening levels and closed the week down 6.2% from the all time closing high and down 1% on the week. For those that count a correction as a 10% move, we didn’t have one. The guys in the SPX and VIX pit may have a different opinion of how the price action felt. All kinds of volume records were tested or beaten and VIX climbed to levels not experienced since December 2011.


The left side of the term structure VIX curve is in backwardation and the right side looks a little more ‘normal’ in contango. Of great interest is the October VIX contract which settled at 21.00 while the cash index finished the week at 21.99. There are two more trading days remaining for October volatility oriented futures and options so that spread should narrow quickly as time passes. The question is does the index move higher or the futures more lower.


I’m always on the lookout for sellers of volatility when VIX is having a headline grabbing day. One trade I saw on Thursday morning, but before we started to see lower levels for VIX and the October VIX futures was a big seller of VIX Oct 19 Calls at about 4.50.   As the payout diagram below shows – VIX settlement under 23.50 will result in a partial profit and if the S&P 500 follows through this week and pushes VIX back down into the teens a full profit of 4.50 could be realized. However, I would be remiss if I did not point out the right side of the payoff diagram below. VIX climbed to 31.06 last week and a resumption of a stock market sell-off may result in VIX returning to much higher levels. I intentionally have the loss line going to 35.00 just to show that short volatility that does not have any sort of hedge against a big spike is a pretty risky and scary prospect.


Gold and Oil Volatility Last Week – October 19, 2014

Commodity related implied volatility tends to react to a break of support or resistance through an upside move. Often implied volatility will drop when a commodity is stuck in a range or a test of support or resistance holds. We actually have a case of both going on right now. I’ll start with support holding in the Gold market.

Before the equity markets took over the headlines there was a lot of buzz about gold which was testing lows put in late last year. GVZ moved up as there was some concern a breakdown in price, but the support level has held for the mean time.   The illustrations are below with a weekly GLD chart along with last week’s GVZ action.

Gold Chart

I did want to note the spike on Wednesday – that was when the stock market was really experiencing a scary day, the result was a rise in volatility across all markets that didn’t last for too long.


The oil market has been making headlines as the price of oil has been hitting low prices not seen in years. This drop in the price of oil pushed the CBOE Oil ETF Volatility Index (OVX) to levels not seen since April of 2013. Again, here’s a weekly chart, but this time of the United States Oil ETF (USO), showing a break of support and then a chart showing how elevated OVX was for the past week.

Oil Weekly 10172014

OVX was already over 30 as of last Friday and spent the whole week in the 30’s based on the break of support along with some big swings in the price of oil.


The volatility term structure curves always tell a more complete and longer term story. I’ll repeat something I say often about following the volatility markets – if you are not looking at the term structure in addition to the spot index you are not seeing the big picture. The big picture for Gold, based on a flat curve is that the jury is still out on this support level holding. A return to contango could be taken as an endorsement of the support line around 114.50 being solid support that is expected to hold. The OVX term structure is in backwardation which can be interpreted as the market expecting oil volatility to come down in time which would mean the price of oil stabilizing at some time and developing a new range.


Emerging Market Volatility Last Week – October 19, 2014

Both EEM and EWZ moved higher last week, despite the drop in the S&P 500. Also, the respective volatility indexes moved up based on an increase in global equity risk perceptions. I’ll start here with the duller of the two and talk about VXEEM.

EEM rose just over .5% and VXEEM was up over 10% for the week. On Wednesday, when the world appeared to be coming to an end, VXEEM finished the day at 31.90 for the first closing price in the 30’s since December of last year.


Next weekend the people of Brazil will choose to keep their existing President or vote in a replacement. The implied volatility of options on EWZ has been elevated and rising leading up to next weekend. Even the most casual of market observers should be aware of the impact the uncertainty of this election has been having on VXEWZ.


The curves below reinforce the election’s impact on EWZ implied volatility. This very unusual shape has been in place for a while with the October contract, which expires this week, being at elevated levels since VXEWZ is expected to be high until next weekend. Just past October, the November contract is at a much more reasonable level which indicates the political storm will be over by then.


Short Term Volatility Last Week – October 19, 2014

The CBOE Short-Term Volatility Index was introduced less than a year ago and since then there have not really been any headline grabbing moves in the volatility space. That was until last week where the high range for VXST stretched from close to 20 up to almost 40. The closing VXST level on Wednesday was the first close over 30 since early December 2011.


There is nothing like a volatile week to shake things up. I have debated changing the method I use to display the week over week VXST curve change for some time. The table showing the week over week changes is the same, however the term structure chart has a slight change. I change the futures to uniformly show the curve change by not altering the underlying contracts. So Week 1 below is the October 15th contract for the October 10th curve and Week 1 represents the October 22nd contract on the October 17th curve. I think it is a better and more consistent picture of what is going on with these short dated futures contracts relative to the spot VXST index.


Finally, VXST option trading has been scattered across many strike prices. The heaviest open interest as of Friday rested at the VXST Oct 22nd 28 Calls followed by the VXST Oct 22nd 21 Calls and VXST Oct 22nd 19 Puts.

NDX and RUT Volatility Last Week – October 19, 2014

The CBOE Russell 2000 Volatility Index (RVX) climbed over 30.00 during the day Thursday for the first time since June 2012. For the week RVX finished at 25.48, up 4.64% while the underlying market was up 2.75% for the week. Yes you read that right, the Russell 2000 was up 2.75% last week which was a week where it didn’t feel like such a thing was possible.


The CBOE Nasdaq-100 Volatility Index rose as well last week, but lagged RVX only gaining 2.25% despite trading over 31 last week.


Both the RVX and VXN term structure curves are in backwardation with VXN having a steeper curve than RVX. Kind of lost in the news shuffle has been the fact that next week is the heaviest week of the third quarter earnings season. Once the large components of the NDX get through reporting earnings (AAPL reports early next week) that curve will flatten and of course if the equity markets follow through with an upside move we will go right back to contango.


Volatility Indexes and ETPs Last Week – October 19, 2014

I hate being a broken record in this space, but the week over week changes do not do any justice to what was last week in the equity and volatility markets. I threw the closing curve from Wednesday in the mix below when VXST closed at the highest level since December 2011.  On Monday VVIX was also at much higher levels closing over 130 for the first time since August 2011 when VIX got all the way up to 48.00 based on a 6.66% drop in the S&P 500.


The long ETPs finished the week higher, but well off the highs for the week. For example VXX was up 7.62% from Friday to Friday, but mid-day Wednesday VXX was over 23% higher than last Friday’s close. I would also like to defend VXX a little more, while it is at elevated levels, and note that from September 18 through Friday VXX is up 41.8%.

ETPs - Indexes

Apparently on Thursday around the open when VXX was over 44 someone decided that enough was enough and sold some VXX Calls. Over 16,000 VXX Nov 50 Calls were sold at 4.80 and over 14,000 Dec 70 Calls were sold at 3.00. By the end of the week the VXX Nov 50 Calls were offered at 2.40 and the VXX Dec 70 Calls were offered at 1.70. There’s still time to go, but so far the timing of those two sells seemed to be near perfect.

Some Volatility Trades that Worked Well in Last Week’s Action

VIX is much higher than it was early last week.  So are VXX and RVX.  Also, the S&P 500 and SVXY are both lower.  Anyone can tell you that, so I decided to do some digging and find some timely trades from last Tuesday and Wednesday (or beyond) when the idea of VIX in the 30’s was something that even a permabear would not have imagined.

First I want to highlight a trade I noticed just under a month ago (specifically September 19th) in the CBOE Russell 2000 Volatility Index option space.  Someone came in and bought RVX Oct 29 Calls for 0.25 and as RVX moved up a little that day they also purchased the RVX Oct 30 Calls for 0.25.  The 29’s traded at 1.25 today and the 30’s were bid at 0.75.

Poor old VXX is always getting flack for not providing good long volatility exposure.  When I defend VXX, I say think about owning it like owning a long out of the money call on volatility.  When you own an out of the money call you often lose money when the underlying market moves up just a little.  You definitely lose money when the underlying market is flat or moves lower.  I just described the price behavior of VXX and it has reacted with quite an upside move over the past few days.

Well the underlying for VXX (October and November VIX futures contracts) are up dramatically over the past few days and VXX is up about 25% since last Tuesday (October 7th) closing today at 40.33.  When VXX was trading at 31.13 there was a buyer of VXX Oct 30 Calls at 1.99 that also sold VXX Oct 40 Calls for 0.21 and a net cost of 1.78.  If this trade is held through the close on Friday and VXX finishes the day over 40.00 the net result is a profit of 8.28.

On last Wednesday (Oct 8th) there was a very boring (but profitable) trade executed in VIX options.  There was a buyer of a good number of the VIX Oct 18 Calls for 1.25.  October VIX settlement is not until next Wednesday October 22nd.  I would think a buyer of those VIX Calls would have taken at least a partial profit by now.  There are also several call spreads that were purchased early last week that have increased dramatically in value in about a week and a half of trading.

SVXY is more or less the opposite of VXX.  It takes an inverse position in VIX futures relative to the long position represented by VXX.  The result is a grind higher for SVXY when VXX grinds lower.  It also means that SVXY will drop when VXX rallies and that is exactly what has happened.  SVXY finished today at 53.26.  Last Tuesday when SVXY was at 74.39 someone bought SVXY Oct 24th 68 Puts at 2.10 and sold SVXY Oct 24th 66 Puts for 1.70 and a net cost of 0.40.  If SVXY is under 66 next Friday and if the trade has not been exited early the result will be a profit of 1.60.

I could go on all night, but there are other duties calling me.  I’m looking forward to taking a closer look at all the different ways to get volatility exposure and how those markets acted this past week over the weekend.


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