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%.

VXN PA

 

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.

RVX PA

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.

VXN RVX

VXST Last Week – 7/6/2014

VXST closed at an all-time low on Thursday based on a strong equity market and a three and a half day weekend. The weekend effect for volatility indexes relates to the indexes being calculated using calendar days.   In the case of VXST the measurement is nine calendar days. When there is a three day weekend there is more of a headwind for VXST and the result is usually VXST losing value the day before the holiday weekend.   The very consistent part of this mini-story is that VXST has always risen the day after a long weekend – I’ll follow up on Monday in this space with a longer explanation after we see what VXST does.

VXST P

The VXST curve is pretty normal for such a low level of the spot index. Of course the July 9th contract is at a premium, but a portion of that premium is reflecting an expected rebound in the index on Monday. In the option space significant open interest exists for the July 9th 9.50 Puts, and July 9th 15, 16, 17 and 20 Calls.   Something that caught my eye is open interest of 2,000 contracts for the July 16th 22 Calls. July 16th is also the settlement date for July VIX options. This makes me wonder if this 2,000 lot is part of a spread trade that incorporates a VIX instrument – I’ll do some digging on Monday to see if that is the case.

VXST Curve

Volatility Indexes and ETPs Last Week – 7/6/2014

VXST closed at an all-time low on Thursday based on a strong equity market and a three and a half day weekend. The weekend effect for volatility indexes relates to the indexes being calculated using calendar days.   In the case of VXST the measurement is nine calendar days. When there is a three day weekend there is more of a headwind for VXST and the result is usually VXST losing value the day before the holiday weekend.   The very consistent part of this mini-story is that VXST has always risen the day after a long weekend – I’ll follow up on Monday in this space with a longer explanation after we see what VXST does.

VXST P

The VXST curve is pretty normal for such a low level of the spot index. Of course the July 9th contract is at a premium, but a portion of that premium is reflecting an expected rebound in the index on Monday. In the option space significant open interest exists for the July 9th 9.50 Puts, and July 9th 15, 16, 17 and 20 Calls.   Something that caught my eye is open interest of 2,000 contracts for the July 16th 22 Calls. July 16th is also the settlement date for July VIX options. This makes me wonder if this 2,000 lot is part of a spread trade that incorporates a VIX instrument – I’ll do some digging on Monday to see if that is the case.

VXST Curve

Emerging Market Volatility Last Week – 7/6/2014

The iShares MSCI Emerging Markets ETF (EEM – 44.16) had a solid week rising 1.87% and VXEEM marched lower based on this price action and the long weekend.   Friday’s closing price of 13.71 is actually the lowest recorded close for VXEEM. The history is not that long, only going back to March 2011, but that’s still an all-time low.

VXEEM PA

The Brazilian market was actually under pressure last week, actually pressure is probably too strong a word as it was down just over one half percent. VXEEM was lower as well, but by only 0.13 and I think we can attribute that to the long weekend which can put a little extra pressure on volatility indexes.

VXEWZ PA

Taking a look at the curves, VXEEM had a pretty even shift with the index moving lower. The VXEWZ curve saw a small move lower in the front month, but the September and October futures actually gained a little value. The steep VXEWZ curve makes me wonder if the markets think the iShares MSCI Brazil Capped ETF (EWZ – 47.84) is going to continue the bullish run it has been on in 2014 through the end of the year.

VXEEM VXEWZ

PUT Index Rose 1510% (with Lower Volatility) Over 28 Years — By Matt Moran

A 2013 paper by BlackRock on “VIX Your Portfolio – Selling Volatility to Improve Performance” noted that – “A strategy that systematically sells volatility on a diversified equity index should capture a positive risk premium over long horizons because it is similar to selling insurance.” One of the strategies highlighted by the paper was the strategy of selling S&P 500® (SPX) index options every month per the CBOE S&P 500 PutWrite Index (PUT).

GROWTH OVER 28 YEARS
Now that we have passed the halfway point of 2014, here is an update on performance of indexes relating to volatility-selling strategies. The price data history for both the PUT and BXM indexes begins on June 30, 1986, and so we now have 28 years of price history for these indexes. The two bar charts below show that the PUT Index has had both the highest returns and lowest volatility of all the five indexes shown. What is a source of strong returns for the PUT Index? The PUT Index sells S&P 500 index options every month, and multiple studies have shown that the S&P 500 options usually have been richly priced in recent decades, as the implied volatility usually has been higher than the subsequent realized volatility.

PUT bar graphs for July 1 Blog

Over the 28-year period from mid-1986 through mid-2014, here are the gains for key total return indexes — the PUT Index rose 1510%, the S&P 500 Index rose 1386%, and the S&P GSCI (commodities) index rose 553%.

PUT line graph for July 1 BlogTo read more studies about CBOE benchmark indexes, please visit www.cboe.com/benchmarks.

First Half 2014 VIX Review

The first half of 2014 is behind us and before we celebrate the birth of our nation by blowing up a small part of it I would like to take a look at the price action for VIX so far this year. The table below compares VIX in 2014 to the price action by year for VIX between 2004 and 2013. Keep in mind 2014 is for six months while the rest of the rows represent full years.

VIX 1H 2014

The first thing that sticks out for me on this table is the last column. I guess 2008 was so bad that it surprises me that is was the only year since 2004 that the S&P 500 lost value. By the way, a pretty big portion of that 6.05% for the S&P 500 this year came during the second quarter. The second quarter is also the period of time that the VIX was making post 2008 lows and getting attention for doing so.

 

Note that the average for VIX is 13.77 this year which is the lowest average since 2006. Reading the popular press you would think that VIX had never been lower, but back in 2005 and 2006 the average VIX closing price was 12.81. Actually in 2006 it was 12.80653 and in 2005 it was 12.80706, but I think 12.81 is good enough for our purposes.

Despite the hubbub about VIX being so low, the high in 2014 is actually higher than the high in 2013. Of course we have a lower low in 2014 than in 2013 which translates into a wider range which is good for a certain kind of volatility trader.

So briefly, VIX has hit the lowest levels since 2007 and the highest since 2012. On average it is low, but has been lower (see 2005 – 2006). The final thing I want to point out on this chart is in 2007 – note the low for VIX was 9.89, but also check out the high (31.09). VIX was low in 2007 and VIX is low now. However, implied volatility tends to revert to a mean over time and that mean is higher than where we are right now. The only question is on the time side of the equation.

Mid-year Update: VPD Index is Up 7.6% Y-T-D, as SPX Historic Volatility Falls to 6.2 – By Matt Moran

JUNE 30, 2014 – As we reach the half-way point in 2014, here is an update on some key investment and volatility-related topics –

1. BENCHMARK INDEXES. In the first half of 2014, the CBOE VIX Premium Strategy Index (VPD) rose 7.6%. The VPD Index tracks the performance of a strategy that systematically sells 1-month VIX futures, and also holds a money market account (more details are at www.cboe.com/VPD). All ten benchmark indexes in the chart below rose year-to-date.

Benchmark indexes June 30 for Blog

2. VOLATILITY INDEXES. As shown in the chart below, so far this year the VVIX rose one percent, but the other five volatility indexes (OVX, VXV, VIX, VXST, and GVZ) all declined by 7 percent or more. Even though many of these indexes have dropped this year, many investors are intrigued by the fact that some volatility indexes have risen more than 30 percent in one day during turbulent market periods when many “traditional” indexes are falling. Data and charts for more than 25 volatility indexes are at www.cboe.com/volatility.

Vola indexes June 30 for Blog

3. LOW HISTORIC VOLATILITY. Some investors have asked if VIX has been at unusually low levels in 2014. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of future 30-calendar-day volatility conveyed by S&P 500 stock index option prices. So far in 2014, the average daily closing level of VIX was 13.8, but the average of 20-trading-day historic volatility for the S&P 500® (SPX) Index was only 10.7. Today the VIX closed at 11.57, and the 20-trading-day historic volatility for the (SPX) was 6.16, according to Bloomberg.

VIX & Hist Vola for Blog

4. VIX FUTURES PRICES HIGHER THAN VIX SPOT. For those who wonder if VIX is low and if there is too much complacency in the markets, it should be noted that the closing settlement values today were 11.57 for the VIX (spot) Index, 16.00 for VIX Dec. ’14 futures, and 17.40 for VIX Mar ‘ 15 futures. VIX futures now are available for trading nearly 24 hours a day, five days a week.  www.cboe.com/ETH.

VIX & fut June 30 table

5. HIGHER VOLUME FOR VIX FUTURES. Average daily volume for VIX futures this year has risen to more than 184,000 contracts.

VIX Fut volu thr June 27

VIX Last Week – 6/29/2014

After a few dips the S&P 500 managed to put up a slight gain last week. We have been through months of small sell offs consistently rebounding and the pattern seems to be repeating. This repetition has changed a little, with smaller market dips and quicker rebounds. Those of you that saw what the S&P 500 did in reaction to the GDP report last week know what I’m talking about.

VIX PA

 

The VIX curve twisted a bit as the index rose and all the futures lost value last week. VIX really didn’t have much room to drop on the downside, so a gain was probably inevitable unless the S&P 500 rallied strongly last week (which it didn’t).

VIX

Friday afternoon the floor was pretty quiet which is status quo when the Cubs are in town and the markets aren’t doing much. However, there was a bullish VIX trade that caught my eye with about 90 minutes left in the trading week. There was a buyer of the VIX July 13.50 Calls at 0.61 that sold the VIX July 17.00 Calls at 0.27 and a net cost (sans commissions) of 0.34. This trade gave me two opportunities, first to show how someone is getting relatively cheap long volatility exposure using VIX options. The other opportunity is to point out that the front month VIX options have strikes in 0.50 increments. This is a fairly new development in VIX trading. The payout at expiration for this VIX July 13.50 / 17.00 Call Spread appears below with Friday’s VIX and July VIX futures closing prices highlighted on the diagram.

VIX 13.50 - 17.00 PO

Russell 2000 and Nasdaq-100 Volatility Last Week – 6/29/2014

The NASDAQ-100 rose over 1% last week and VXN dropped by about 2%. The VXN reaction may have been a bit more dramatic if we weren’t already at pretty depressed volatility levels. Also, other broad based market indexes were not as resilient last week which may have kept VXN from dropping further.

VXN PA

The Russell 2000 is still lagging in 2014 and the 0.09% gain last week did not help the RUT play catch up to the S&P 500 or NDX. Based on Russell 2000’s lagging performance RVX has remained a relatively high level when compared with VIX and the 4% gain in RVX last week placed RVX at more than a 5 point premium to VIX which is well above the 2013 average spread.

RVX PA

The different performance of VXN and RVX last week carried over to their respective term structure curves as well. VXN has a fairly parallel shift downward while the rise in the spot RVX index was not reflected in gains for any of the three futures which all lost value last week.

VXN RVX

Gold and Oil Volatility Last Week – 6/29/2014

It appeared that things were not getting any worse in Iraq (or anywhere else that oil comes from last week) and the results was a lack of follow through to the upside for oil futures and the United States Oil Fund (USO – 38.98). That sort of price action following a run up in the price of oil usually results in a little compression of implied volatility of the associated option prices. That’s exactly what we got last week in the CBOE Crude Oil ETF Volatility Index (OVX – 16.44).

OVX PA

 

With a few exceptions the price of gold has been in a fairly defined range for some time. More often than not means that the SPDR Gold Shares (GLD – 126.66) has closed in the 120’s over 80% of trading days in 2014. For those keeping score the exact number is 102 of the 123 trading days in 2014. The chart below shows GLD this year for a visual interpretation.

Gold Weekly 2014

With GLD mostly range bound the implied volatility of options on GLD remains at relatively low levels. GVZ drifted lower last week which has become a regular pattern in 2014.

GVZ PA

The curves show a little divergence these days. The GVZ curve seems to indicate more of the same with respect to a lack of volatility. The OVX curve shows a little extra risk being priced in when focusing on the July futures. That contract expires on the open July 16th so time will tell if the extra premium in the July contract is justified or not.

GVZ OVX

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