Weekend Review – VIX Futures and Options – 7/17/2016

With VIX testing 2016 lows this past week the soon to be retired July future headed lower at a slightly faster rate than VIX dropping 6.43% versus 4.02%.  Even with the bigger loss on the week the July contract finished the week at more than a one premium to VIX.  We will see on Wednesday morning if the futures or the spot index win the tug of war into July settlement.  I would be remiss if I didn’t point out the steepness of the VIX curve from August to December.  VIX is low now, but the futures are braced for some sort of move higher.

VIX Curve Table

 

In a previous blog I mentioned VIX call buying that appeared to be short covering on Friday.  Here are the two instances that I came across.  First, one good trade appears to have sold 1000 of the VIX Jul 27th 22 Calls for 0.75 back on July 1st.  They came in Friday and bought those contracts back at 0.15 for a nice profit of 0.60.  The second trade has a couple of moving parts.  Back on July 6th there was a seller of 3000 VIX Jul 27th 15 Calls at 3.12 who also purchased 3000 VIX Jul 27th 23 Calls for 0.70 and a net credit of 2.42.   They closed on leg of this trade by covering the short calls for 0.85 on Friday and chose to leave the long piece of the spread trade open.  This means they have booked a profit of 1.57 and if we get any volatility event in the next few days they may improve on that outcome by cashing out the long 23 Calls.

Weekend Review – Volatility Indexes and ETPs – 7/17/2016

Short term volatility was the big loser among the four S&P 500 related volatility indexes as VXST lost over 10% last week.  This was more than two times the drop in VIX and more than three times the drop in VXV and VXMT.  The result is a pretty darn steep curve indicating concerns about the second half of this year for the stock market are lurking around in option volatility.

VXST VIX VXV VXMT

 

Despite the drop in VIX the VIX of VIX rose last week.  As I typed that I realized that two of the bigger VIX option trades I saw on Friday involved traders covering short VIX call positions.  Keeping that in mind I may be accurate in saying that the higher VVIX is due to the move lower in VIX.  Finally, another thing that stood out on the table below was TYVIX managing a gain last week as well as the 10-Year T-Note futures experienced a relatively big drop.

VX Table

 

Since VIX remained low and the front two month futures lost value VXX and UVXY were lower and SVXY gained value.  For the year SVXY is now up over 14%, VXX is down almost 42% and UVYX has lost over 76% after being up over 100% for the year.

VXX UVXY SVXY PERF

 

I’ve decided to add a new weekly update to this blog.  I’ve neglected many of the other volatility indexes quoted by CBOE so I’m going to include an update of the performance of those indexes as a final piece to this blog.  I sorted last week’s volatility index performance from biggest gain to biggest loss and the winner on the upside was VXIBM.  This is a function of IBM reporting earnings this coming week and I wouldn’t be surprised to see VXIBM on the other side of this table next week.  The big loser was VXEFA which may be best described as a representation of all developed markets outside of North America.  I’m going to attribute this to a resumption of normalcy in Europe  after the final panic about Brexit came out of the markets.

Vol Indexes Big

 

New SPX Monday-Expiring Weeklys Options To Launch Next Month

CBOE recently announced that it plans to list S&P 500® Index (SPX) Monday-expiring WeeklysSM options, beginning August 15, pending regulatory approval.  With the expected introduction of SPX “Monday Weeklys,” CBOE will offer SPX options with Monday, Wednesday and Friday expirations.

SPX Weeklys are one of CBOE’s fastest-growing products, with volume in 2015 setting a 10th consecutive annual record. The chart below shows that SPX Wednesday-expiring weekly options set new volume records in every month since their introduction last February.

1 - SPX Wed Weeklys per month thru June

COMMENTS BY CEO

The CBOE News Release noted that CBOE Holdings CEO Edward T. Tilly said –

“We are pleased to further expand our SPX product complex and build off the successful February launch of SPX Wednesday Weeklys with the introduction of SPX Weeklys with Monday expirations. Weeklys provide greater trading precision and with new Monday Weeklys, investors will be able to efficiently hedge over-the-weekend risks.  With three different expirations in our SPX Weeklys product line, investors will have even more opportunities and flexibility when trading the S&P 500.”   

 

FEATURES OF SPX MONDAY-EXPIRING WEEKLYS OPTIONS

Trading Hours — Extended and Regular Trading Hours currently in place for the existing SPX/SPXW options will be followed.

Ticker Symbol — SPX Monday-expiring Weeklys series will be available for trading under option symbol SPXW.

Expiration and Final Trading Day

  • SPX Monday-expiring Weeklys options are PM-settled.
  • The expiration date (usually a Monday) will be identified explicitly in the expiration date of the product. If the Monday of the week in which the options expire coincides with an Exchange holiday, the expiration date will be on the next business day (usually a Tuesday). The expiration date for each option is also the last trading day for that option.
  • SPX Monday-expiring Weeklys may expire on any Monday of the month, other than a Monday that coincides with an End-of-Month (“EOM”) expiration date.
  • Expiring SPX Monday-expiring Weeklys options will cease trading at 3:00 p.m. Central time on their last trading day. All non-expiring SPX Monday-expiring Weeklys options will continue to trade until 3:15 p.m. Central time.
  • SPX Monday-expiring Weeklys option series will not be included in the strip of option series that will be used to calculate the CBOE Volatility Index® (VIX®) spot value or the exercise or final settlement value of VIX Index options and futures.

 

FEATURES OF WEEKLYS OPTIONS

Contracts with weekly expirations allow investors to implement more targeted buying, selling, spreading or hedging strategies. In addition, futures and options with weekly expirations can help investors take advantage of breaking news or known economic events, such as earnings, monthly U.S. economic reports and Federal Reserve announcements.  Additional information on Weeklys options and futures can be found at www.cboe.com/Weeklys. CBOE pioneered short-term options trading in 2005 by introducing the first weekly expiring options contract.

 

JULY 11 SPX SKEW CHART

The SPX skew chart below shows implied volatilities at various strike prices and 12 upcoming expiration dates in July and August for SPX options. In general, the implied volatilities for out-of-the-money (OTM) SPX puts were higher than the implied volatilities for at-the-money SPX options. The OTM puts often are used for portfolio protection.

2 - SPX skew Livevol July 11

Beginning next month, after the introduction of the SPX Monday-expiring Weeklys options, there will be even more SPX expirations in near-term months.

MORE INFORMATION

The microsite for SPX Weeklys options is at www.cboe.com/SPXW.

For an overview of SPX Monday Weeklys options contract specifications and other operational details, refer to CBOE Regulatory Circular RG16-119 at –

http://www.cboe.com/aboutcboe/legal/crclreg.aspx

What is Volatility Saying about the Price of Gold?

I’ve kept my eye off gold this year and boy have I missed a ride. The GLD ETF is up about 28% in 2016 which leaves most markets in the dust. Apparently #Gold is a trending topic today on Twitter as well. S0 even though the shiny metal is higher, is there any opportunity being anticipated for the rest of 2016?

To get a feel for what the market thinks, I always consult option implied volatility. Luckily CBOE has the CBOE Gold ETF Volatility Index (GVZ) where I can get an idea if option players (who we all know are the smartest of traders) think more price action for gold is on the horizon. The chart below compares GLD and GVZ daily price action in 2016 through Thursday.

GLD GVZ

 

GVZ is off the highs for 2016, but still above this year’s average of about 19.   We can take this as the option market is still a bit on edge with respect to future price moves. Traders who like volatility should be happy to hear this. So I took things a step further and look at the option skew for the weekly expirations for GLD from July 15th through August 19th. I grabbed the data from LiveVol and created the chart below.

Gold Skew

 

GLD was just over 129.00 when I put this together so I looked at options with strike prices from 124 to 134. Note to the left all the lines are pretty flat, with the exception of next Friday’s expiration. Going in the other direction the curves all seem to trend higher. That means out of the money call implied volatility moves up as we go farther out of the money. Another way to think of this is traders selling the puts are not demanding as much premium as call sellers. Traders want to get paid to take on risk and according to this chart they are demanding a higher risk premium to take the other side of call buyers.

So where is the risk? The option guys say the risk is for a move to the upside. Are they right? Time will tell…

Weekend Review – VIX Options and Futures – 7/10/2016

VIX finished the week at 13.20 – only 0.10 higher than lowest 2016 close of 13.10.  The front month (July) futures contract was down slightly more than VIX this past week.  Anecdotally I’ve noticed in the past when we see VIX down significantly in reaction to the employment number that the front month contract seems to give up extra value.  I attribute this to a lack of anticipated market news after the employment number until expiration.

VIX Futures Curve

 

At least on trader believes VIX is going to remain at low levels over the next couple of weeks.  With VIX at 13.56 and the July VIX contract at 15.20 there was a seller of 3,000 VIX Jul 16 Puts at 1.45 who also purchased 3,000 VIX 17 Puts at 2.29 and a net cost of 0.84.  As long as VIX remains under 16.00 into expiation this trade will result in a profit of 0.16 and the worst case scenario is for VIX to finish over 17.00, both options expiring with no value and the 0.84 cost resulting in a loss.

VIX PO

 

Weekend Review – Volatility Indexes and ETPs – 7/10/2016

I was participating in the Vol Views podcast Friday around lunch time and decided to take a look at the whole suite of volatility indexes and see if anything was higher.  None of the 29 volatility indexes CBOE quotes were higher at that time and none of them finished higher on Friday.  The list below shows the price changes ranked on a percentage basis on Friday.Vol Index Change

 

The four S&P 500 related volatility indexes moved lower last week.  The largest drop came from VIX which lost over 10% while the smallest move to the downside was VXST (9-day volatility) which was down about 3 ½%.  VIX is also only 0.10 higher than the 2016 closing low while VXST is still well above the 2016 low of 9.77.

VXST VIX VXV VXMT Curve Change

 

The VIX of VIX (VVIX) remained fairly high in the mid-80’s and SKEW is still a bit elevated.  The ETPs did what they do when the stock market is higher with the long and leveraged long funds down dramatically for the week and XIV and SVXY reaping the rewards of the equity market rebound from the Brexit scare combined with a positive reaction to Friday’s employment report.

VXX Table

 

Finally, a glance at the year to date performance for the funds that represents long, leveraged long, and short volatility strategies.  SVXY representing short volatility is now up 9.4% for the year with just about all that coming last week.  VXX is down 39.3% and UVYX is down 74.2% after being up as much as 100% for the year.

VXX UVXY SVXY Perf

 

Weekend Review – Volatility Indexes and ETPs – 7/3/2016

In hindsight volatility definitely overshot to the upside in response to Brexit and the price action on Monday where VIX and the S&P 500 both moved lower together was a sign of things to come last week. The 42.66% drop in VIX was the biggest week over week drop on record (going back to 1990). The whole VXST – VIX – VXV – VXMT underwent a shift from one extreme to the other last week.

VXST VIX VXV VXMT Curve

SKEW put in an all-time high and then backed off to more normal levels. TYVIX also had a pretty big drop as the mind of the global financial markets shifted from end of the world back to normal mode. The one volatility index on the table below that remains at a cautious level is VVIX. Do not discount the elevated VVIX level as an outlier as the VIX of VIX has done a good job of being a leading indicator for market volatility for several months now.

VXX Table

Finally, in the ETP space, last week VXX gave up 20%, UVXY almost doubled that, and SVXY rose over 17%. It just took a week, but SVXY is back to green for 2016, however so slightly.

VXX SVXY UVXY Chart

Weekend Review – VIX Futures and Options – 7/3/2016

The curve below is what happens when you have the biggest week over week drop for VIX on record. The 42% loss in VIX shattered the previous largest drop of 36.53% which occurred in the last week of 2012. Not so coincidentally both were weeks before a three-day weekend.

VIX Curve - Table

Late Monday, with the July VIX Futures at 23.70 and spot VIX at 23.85 someone came in taking a long position in the VIX Jul 20th 22 Puts paying 2.75. The payoff at July settlement appears below, but by the end of the week with both the July futures and spot VIX much lower the trade had an unrealized profit of 2.85 as the bid side for the July 22 Puts was 5.60 to end the day.

VIX PO

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

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