Last Week in VXST – 9/28/2014

Thursday VXST was up as much as 38% intraday before settling the day up ‘only’ 23%. I am well aware of the Monday morning quarterbacking here, but seeing VXST come back in like that despite the S&P 500 closing near the low of the day Thursday may have given traders confidence that the sell off Thursday was not going to follow through on Friday.

VXST PA

 

The curve finished the week pretty flat which indicates uncertainty. The stock market bears won the tug of war on Thursday and the bulls were the winners on Friday. Looking at the Oct 1st VXST future in line with VXST makes me think there is a lot of wait and see going on for next week.

VXST Curve

I checked through the VXST option trading activity last week and came across what appears to be an unfortunate seller of volatility. We are all aware of the S&P 500 sell off on Thursday that resulted in VXST running up to 17.85 before finishing the day at 15.94. On Wednesday it appeared a trader expected a week of quiet activity and sold some slightly out of the money calls.

Wednesday in the afternoon someone came in and sold a little over 200 of the VXST Oct 1st 17 Calls taking in 0.15. VXST finished the day on Wednesday at 12.69 and the Oct 1st VXST future closed at 13.40. On Thursday VXST ran up as high as 17.85 which places those options 0.85 in the money – of course VXST options pricing is based on the corresponding future and the VXST Oct 1st contract ‘only’ ran up to 16.90 on Thursday. Either way, this is still a pretty painful trading experience. For a visual of what this trade lived through on Thursday see the payoff diagram below –

VXST PO

If you are still getting up to speed on the relatively new VXST make sure to visit www.cboe.com/vxst or drop me an email with questions at rhoads@cboe.com.

Last Week in Russell 2000 and Nasdaq-100 Volatility – 9/28/2014

I flipped a coin and decided to start with the Russell 2000 (RUT) volatility action last week. I was 50 – 50 on what to begin with as I found both RVX and VXN price action equally of interest last week, but not for the same reasons.   The poor RUT lost 2.41% last week which puts the small cap index down 3.81% for 2014. Also this year RVX has been elevated relative to recent history and the two other tradable broad based volatility indexes (VXN and VIX). The 12% gain in RVX last week was actually much less than the move higher in VIX and VXN.   As mentioned RVX is at elevated levels to the VIX and VXN so there a higher base when determining the price move. However, RVX rose 2.15 points while VIX was up 2.74 and VXN moved up 3.05 points. Remember implied volatility is an anticipatory measure and the higher level of RVX can be taken as an indication that RUT will drop more than the S&P 500 or Nadaq-100 (NDX) if there is any weakness in the US markets.

RVX PA

 

VXN was over 22% higher. As mentioned above VXN rose more on an absolute basis than VIX or RVX last week. In addition to the move lower in the underlying market (NDX) VXN is also displaying a bit of anticipation (or worry) in front of 3rd quarter earnings which kicks off in just over a week.

VXN PA

The two curves are slightly different and I’m going to play the earnings card here as well. The flatter VXN curve may be showing an expectation of lower levels in time as earnings season passes. The steeper RVX curve tells me that the market still thinks there is more risk in small cap than large cap stocks.

VXN RVX Curves

Last Week in Volatility Indexes and ETPs – 9/28/2014

This is one of those weekends where I get to add a 3rd curve into the mix below. Thursday, as all of us that were not under a rock know, was a hectic day for the equity market. Hectic days in the stock market result in green days for volatility. The purple line below shows the closing VXST – VIX – VXV – VXMT curve on Thursday as well as the week over week curves. Note the change from Thursday to Friday was a pretty orderly one, but also note that VXST remained at a slight premium to VIX. Two thoughts on that premium – 1) traders are still concerned we aren’t out of the weeds quite yet or 2) VXST remained high as this coming Friday is the employment report.

VXST VIX VXV VXMT Curve

 

The long exchange traded products did what they were designed to do this past week, giving holders nice returns. VXX was up almost 8% which is pretty impressive considering the October futures have over two more weeks until expiration. Of course the short ETPs were both lower, down over 8%. One other week over week change that stands out is the VVIX which finished the week over 90 after getting darn close to 100 on Thursday. This is a measure applying the VIX methodology to VIX options which tends to move higher when there is big demand for VIX calls.

ETN - Indexes

Finally, I came across a pretty interesting trade and profitable trade from Thursday. As we were falling apart and SVXY was trading at 77.46 someone came in and sold some of the SVXY Sep 26th 80 Puts at 3.20. This trade is not a suggestion, recommendation, or for the faint of heart. In this case, the seller benefitted as the stock market firmed up on Friday SVXY climbed higher and finished at 79.90. So an SVXY put that could be sold for 3.20 with just over 24 hours until the settlement price was locked in finished 0.10 in the money.

Last Week in VIX – 9/21/2014

The S&P 500 put up another record high last week and VIX dropped. However, it is worth noting that the intraday low in VIX this past week (11.52) was a bit higher than the recent dips associated with new S&P 500 highs.  Maybe, like many of the permabears in the world, I’m stretching while looking for a crack in the armor that is the US stock market.  But when reviewing data I was truly surprised to see that we did not break 11.00 and that just four weeks ago there was a lower low in VIX.

VIX PA

 

The curve is a bit steep between the spot index and front month future. I guess that hat may be referred to as an October effect which is associated with market corrections always seeming to occur around this time of year.  I’m actually going to add a little anticipation into the mix and say 3rd quarter earnings may be hanging over VIX as well.

VIX CURVE

VIX continues to lurk around pretty low levels, but that does not stop traders who expect VIX to stay relatively low. On Thursday there was a trader who sold just over 16,000 of the VIX Oct 18 / 21 Call Spreads for 0.18 by selling the VIX Oct 18 Calls at 0.57 and buying an equal number of the VIX Oct 21 Calls for 0.39.  The motivation for this trade must be that VIX remains low or if there is a move up in VIX it does not go much beyond the lower strike of the spread (18.00).

VIX PO

Market Myopia

As investors, we necessarily rely on history.  How we analyse that history is particular to each investor – some will look for technical patterns, some at fundamental data, still others will build quantitative models.  But all of us need data, and history is our only source.

We may have to rely on history; we don’t have to fall prey to what the behavioural economists would call “recency bias.”  Indeed, taking a longer-term view can provide invaluable perspective.  Two popular views of the current environment provide a specific example:

  • Unprecedented levels of low volatility driven by central bank stimulus in the past two years have caused the market to become complacent; valuations are proof positive of a stock market bubble.
  • Moreover, when the bubble “pops”, the modern market of leveraged derivatives, high frequency trading and globalized capital has engendered a greater risk of systemic volatility and, when things get interesting they are going to get very interesting, very fast.

A running thread in both theories is the “risk on/risk off” dynamic.  We are now either in utter turmoil or dulcet calm, each exaggerated by the rapid and capricious response of a highly mobile and sophisticated investment community.

An examination of recent history would appear to support these claims.  It certainly looks like a new, more volatile dynamic since the beginning of the financial crisis.  And as we all know, volatility has registered remarkably low levels more recently.  Are we set to continue in a bar-belled digital age of all volatility, or none?

Pic1

Now, there is a good reason why the chart above begins in 1990.  The VIX data begin then; we don’t know what the VIX would have been during the “black Monday” crash of 1987 (although there are clues, they suggest the answer is higher than at any point subsequently).  Nor do we have any idea of the appropriate level of implied volatility during the “Knickerbocker Crisis” of 1907.

However, what we do have – in the Dow Jones Industrial Average – is a market bellwether with a remarkably comprehensive history.  Here is 118 years of realized monthly volatility in the DJIA:

Pic 2

Clearly, long periods of low volatility are not unusual.  Whatever else may have been occurring in the 1960’s – and despite a war and an assassinated president – there wasn’t much turmoil in U.S. blue chips.  Extended periods of both high and low volatility have been a part of the market since it was invented.

Moreover, viewed in this longer perspective, the past decade appears thoroughly ordinary.  A bit less volatile than average recently, a bit more volatile than average during the 2000s.  But, in the grand scheme of things, it is business as usual.

Pic 3The phrase “it’s different this time”, uttered by a financial professional, typically provides grounds for mockery.  Sometimes it’s true.  But if you don’t take the long view, it’s hard to see whether this time is actually different at all.

 

Last Week in VIX – 9/7/2014

A general takeaway from the CBOE RMC Europe conference last week is that the stock market seems ready for some sort of correction. You would not get that sense by looking at VIX and seeing a 12 (or lower) closing handle for every day over the past three weeks. However, looking at things in context, none of those closing levels have been below 11.00. We saw several 10’s back in June and July. Of course the S&P 500 is just over 1% higher than when we saw the last closing 10. I’m not saying VIX is high, but just pointing out that it is higher than it was when the S&P 500 made some of those other all-time highs this year.

VIX PA

 

The curve isn’t showing much fear, at least when looking at the futures expiring around the treacherous September and October time periods. Going all the way out to May we have futures closing under 18 which is pretty incredible and can just be piled on to the long list of evidence that show complacency with respect to the equity market.

VIX CURVE

Last Week in Russell 2000 and Nasdaq-100 Volatility – 9/7/2014

The Russell 2000 continues to lag the Nasdaq-100 and S&P 500 in 2014. RUT was down slightly on the week while NDX and SPX were both higher. For the year RUT is up just over 0.5% while the other two broad based indexes with tradable volatility markets are up 13.86% and 8.62% respectively. The result has been RVX at a premium for most of 2014 relative to VXN and VIX.   That premium is at the low end relative to VIX this week which may indicate a change in attitude about domestic stocks or US risk versus global risk.

RVX PA

 

NDX was up slightly last week, but VXN rose over 4%. This was the biggest move among VIX, RVX, and VXN and can be attributed to one company – Apple (AAPL – 98.97) which will introduce some new products next week which is an implied volatility heightening event for both AAPL and NDX options.

VXN PA

The curves remain a little steep, but in a normal contango shape. The RVX curve hardly budged last week, while we got a sort of twist in VXN trading with the Sep future holding up in anticipation of a potentially big move in NDX this Tuesday.

VXN RVX CURVE

Last Week in Short-Term Volatility – 9/7/2014

VXST moved up a little on Monday, as it always does after a long weekend and worked higher into Friday’s employment report on Friday. Note that on Friday, with the S&P 500 under a little pressure, VXST actually opened lower. We are still getting a feel for how VXST acts around big economic numbers and it seems to display some of the behavior that we normally associate with individual stock implied volatility around an earnings event.VXST PA

The curve flattened a bit with the employment report and a three day weekend behind us. Checking in on the VXST option market there are several lines with open interest of 1000 or more expiring next week. The VXST Sep 10th 15, 18, and 20 Calls all seem to be generating some noise.

VXST CURVE

Last Week in Gold and Oil Volatility – 9/7/2014

Oil futures finished the week closer to 90.00 than 100.00.   This continues to perplex me as the demand for energy seems to continue to increase while the supply side of the equation has the potential to be impacted by a gamut of potential issues. OVX moved up on the week, mostly in the early part of the week, based on a move lower in oil futures.

OVX PA

 

The gold market appears to be at a crossroad and not the one that I would have expected. GLD is approaching the bottom end of the 120 – 130 range as shown in this GLD weekly price chart that covers all of 2014.

Gold Weekly 09052014

GVZ moved higher as well most likely based on a potential break of the support line in the chart above.

GVZ PA

Sometimes what is not said may be as important as what has been said. This past week at the CBOE RMC Europe 2014 conference I never once heard anyone mention gold or oil which was not the case in 2014. This time last year there was no real interest in emerging markets and those markets have been rock stars in 2014 (at least so far) and came up a few times in conversations this past week. The low levels of volatility, despite the rise in both last week, sort of quantify this last of interest. Often the next area of trading opportunity is not where the masses are looking and the crowd isn’t watching GLD or USO too much these days.

GVZ OVX CURVE

Last Week in Emerging Market Volatility – 9/7/2014

This past week I was lucky enough to get to participate in CBOE’s Risk Management Conference just outside of Dublin, Ireland. There was one session where the presenter asked for members of the audience to raise their hands if they feel the emerging market sector is a safe place to get equity exposure these days. A good number of attendees raised their hands and he noted how interesting it is, with EEM up 10% this year, that people feel safe about the emerging market sector when no one was recommending putting money into emerging market stocks at the beginning of 2014. VXEEM, at pretty low levels, reflects this same positive outlook for EEM.

VXEEM PA

If people like EEM which is up 10% they must love EWZ (Brazil) which is up over 21% in 2014. However, Brazil is in its own little world, at least for the next few weeks, while we wait for national elections in early October. Hence the relative high level of VXEWZ which should come back down once the election result seems certain.

VXEWZ PA

The most interesting thing showing up on the charts below should stand out to even the most casual volatility market. To use one of my mother’s favorite phrases (imagine the southern Alabama twang), “That VXEWZ curve just ain’t right”. No, it is not, however, it does tell a little story, and not the kind that contain a few white lies for illustration purposes.   The drop from October (the first future to expire after the elections) to November can be taken as the market expecting quick resolution once the Brazilian election is over. Now whether the results will be positive of negative for Brazilian stock is another story.

VXEEM VXEWZ CURVES

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