Last Week in Volatility Indexes and ETPs – 5/26/2014

I will review the impact of a three day weekend when I focus directly on VXST in a later post. However, VXST did close on Friday at 9.49 which creates a new all-time low breaking the previous record set on January 10 of this year. CBOE has VXST history going back to the first day of 2011 and before 2014 VXST had never closed under 10.00. In 2014 we have a couple of instances of VXST settling the day below 10.00.

The other volatility indexes that are based on the S&P 500 also finished the week lower. VIX closed just 0.06 higher than the post 2008 low of 11.30. We seem to be entering the summer with the sort of market complacency that accompanies vacations and cooking out.


The volatility related ETPs reacted as would be expected being drug down with lower VIX and the VIX futures markets trading lower as well. Do note that June VIX is the front month and is a heavy contributor to the performance of VXX, TVIX, VIXY, VIIX, and UVXY. On Friday these funds were all comprised of 83% June and 17% July futures.


Last Week in VIX – 5/18/2014

VIX experienced one of those short lived spikes (I may be being generous with that word) that have become the norm. I’m referring to the price action on Thursday last week which is the only green bar on the chart below. On second thought I’m pretty certain that spike is too generous since the high on Thursday was lower than on the previous Friday. Maybe the better term would be ‘upward blip’.



With only two trading days remaining until expiration the May VIX future went out at a 0.81 premium to the spot index. I assume this is a weekend fear premium and studying the last weekend premium is on the extended list for my summer intern that starts on Monday. Also, Monday morning we’ll see if that premium shrinks quickly depending on how the S&P 500 and spot VIX begin the day.


Finally, Steven Sears kind of stole my thunder in the Striking Price column in Barron’s this weekend. He notes that a couple of derivative strategists are suggesting taking advantage of the low level of VIX to shop around for cheap VIX calls. One trade he points out involves buying VIX Jun 15 Calls and selling VIX Jun 20 Calls. Also, on Monday there was a buyer of 40,000 of the VIX Jun 18 Calls that paid between 0.60 and 0.64 cents per option.

Finally, here’s an interesting perspective on what it would take to get VIX to remain at high levels (shameless promotion warning – this author is quoted in this article) –

Last Week in Gold and Oil Volatility – 5/18/2014

When we approach VIX in a historical context we often talk about VIX in terms of 2008. For instance saying something like, “VIX made a post-2008 low on so and so day”. For the CBOE Gold ETF Volatility Index (GVZ) the reference point has been April 15, 2013. For those with short memories the price of gold dropped dramatically over a two trading day period between April 11, 2013 and April 15, 2013. GVZ also was up over 100% over those two days. This past week GVZ was at a post April 15, 2013 low in the 13’s. Interestingly the last time GVZ closed lower was on April 9, 2013 – two days before there was a crash in the price of gold. Since GLD only rose 0.40 last week the low GVZ should not be too surprising.


The implied volatility of USO options remains at a pretty low level as well which continues to perplex market participants. The OVX closing at 15.42 on Friday is the third lowest closing price on history with lower closes occurring toward the end of December in 2013. OVX is also at a low level despite oil futures over $100 and USO climbing over 5% last week.


Both pricing curves are not terrible steep despite low price for the underlying indexes which may be taken that the market thinks orderly price changes are expected this summer. Of course as we saw last year in April things in the gold and oil markets can change very quickly.


Last Week in CBOE Short-Term Volatility Index Markets – 5/18/2014

VXST appeared destined to flounder around this week and then Thursday came along. As with just about every spike in near term volatility indexes over the past year or so the spike was short lived and despite rallying almost 20% on Thursday VXST finished the week at 11.00 down 1.5% for the week.



The futures curve remains pretty steep despite (or maybe because of) the low level of the VXST index. The picture is pretty similar to last week and the high level for the May 28th future relative to May 21st narrowed some, but still sticks out like a sore thumb to me. We’ll see if that extra premium is justified.


Finally, on Thursday as VXST was rallying one trader took advantage of VXST moving up and sold 500 of the VXST May 21st 18 Calls for 0.20. With VXST closing at 11.00 on Friday this trade is safe as long as VXST does not settle over 18.20 on Wednesday morning.   That’s a 65 percent move which is not unheard of, but barring some sort of unexpected event over the weekend is a bit unlikely. Again, it could happen and has happened historically, but a perfect storm that pushes the S&P 500 down in a quick and dramatic fashion would be needed.

Last Week in Nasdaq-100 and Russell 2000 Volatility – 5/18/2014

The CBOE Nasdaq-100 Volatility Index (VXN – 15.25) followed the lead of VIX this past week and dropped to begin the week and ended the week lower.   The little scare we got on Thursday did not seem to have as much of an impact on VXN as it did on RVX or VIX. The Nasdaq-100 (NDX – 3587.20) did rise almost 1% while the S&P 500 was little changed on the week which resulted in VXN dropping over 7% while VIX lost about half the value that VXN did on the week.



The star of 2013 is now the red supergiant of 2014. For those of you that do not spend your free time watching the updated version of Cosmos a red supergiant is the first stage of a dying star. This geek reference is about the Russell 2000 which had a great 2013 relative to the S&P 500 and Nasdaq-100, but is giving back some of that lead in 2014.  This seems to be the result of international and emerging markets experiencing growth that influences the performance of the SPX and NDX more than the RUT.   Last week RVX barely dropped despite RUT being lower as well. Year to date the RUT is down about 5% while the NDX is close to unchanged and the S&P 500 is up about 2.6%. The result of this underperformance in RUT has been an elevated level for RVX relative to the two volatility indexes based on broad based US stock indexes. That spread remained wide as RVX ended up the week down about a half a percent.


The curves are steep and showing contango that is associated with normal market conditions. RVX being at a premium to VIX and VXN is carrying over to the respective futures markets as well.


Last Week in Emerging Market Volatility – 5/18/2014

The risk premium as priced in by options on the iShares MSCI Emerging Markets ETF (EEM – 42.94) continues to come under pressure as EEM has been holding its own versus developed markets this year. As seem below VXEEM gapped lower on Monday and stayed low relative to the previous week even as the equity market made some participants a bit nervous later in the week.


The start of the emerging market world this year has been Brazil. The iShares Brazil Capped ETF (EWZ – 49.28) gained 1.5% last week and is now up 10% on the year. VXEWZ finally seems to be buying into the bullish market action and VXEWZ finished the week down over 8%.


Both VXEEM and VXEWZ curves continue to maintain ‘normal’ contango shaped term structure charts with the drop in the respective spot volatility indexes. VXEEM is also getting a lot of trading attention with the futures open interest around 2000 contracts as of Friday.


Finally, I did come across a big bullish (and complex) spread trade on EEM that was traded mid-day Thursday. Looking out past the summer there was a seller of both the EEM Sep 39.00 Put at 0.81 and EEM Sep 44.50 Call at 0.60 who used those proceeds to purchase the EEM Sep 43.00 Call at 1.22. Note that this trade was initiated for a credit of 0.19 (0.81 + 0.60 – 1.22) excluding commissions. That 0.19 is the resulting profit if EEM is between 39.00 and 43.00 on the close of the third Friday in September. The risk is to the downside and as EEM trades below 38.81 the trade incurs losses and there is no safety net below. The best case scenario involves EEM at 44.50 or higher where the trade profit would be equal to 1.69. With all those moving parts a payoff diagram is warranted and appears below –EEM PO Corrected

Last Week in Volatility Indexes and ETNs – 5/18/2014

The S&P 500 was little changed on a week over week basis despite a fairly scary day on Thursday. The result for the four indexes that measure different standard implied volatility levels based on SPX option trading was a little changed week as well. VXST really took a dive on Friday dropping 17% after gaining 19% the day before. The nine day VXST is definitely living up to the reputation of being more volatile than VIX which for newbies measures 30 day implied volatility. The term structure chart showing the week over week change for VXST, VIX, VXV (93 days), and VXMT (184 days) appears below.



In the exchange traded product space the unleveraged long oriented ETPs such as VXX dropped about four and half percent last week. VIX was down less than four percent, but the gap between the two front month futures and VIX actually narrowed putting more pressure on VXX than on VIX. At this point VXX is comprised of much more exposure to the June VIX future than May since May contracts settle on Wednesday.

VIX Indexes and ETPs

India VIX Futures Point to IV Drop After the Election Results Announced

A couple of weeks ago I was talking VIX to a completely new crowd in Delhi, Kolkata, and Mumbai India. The National Stock Exchange of India launched futures trading based on the India VIX (NVIX Futures) recently and I had the opportunity to meet with a wide variety of traders and investors to discuss how volatility futures markets act relative to the corresponding spot volatility index.   My visit was timely for a couple of reasons. First NVIX trading was relatively new so there were many questions regarding strategies and price behavior. The other factor relates to how the markets had been acting over the past few weeks in India as the country was in the midst of a significant national election.

The NVIX futures market actually has weekly expirations even though the underlying index is a 30 day volatility measure. The implied volatility of options on the Nifty Fifty (the underlying market for the India VIX) was at a relatively high level and the NVIX futures contracts were also at a high level. However, during my visit the first NVIX future that was going to expire after the election results were announced began trading. Since then another contract that expires after the election is being actively traded. The result a couple of days ago was the pricing curve below.

India VIX Curve

Before experienced volatility traders freak out at the spot index quoted at 3200 be aware than the futures are quoted at price level 100 times the underlying index – 3200 means the India VIX is at 32. More significant on this chart is the big drop between the May 13 and May 20 futures prices. The market is expecting much lower IV after the election results. This is a case of market volatility being more anticipatory than is the norm. We saw this sort of behavior in the US markets due to multiple deadlines that the government set in 2013. Also, we are starting to see similar behavior in VXST futures contracts since their launch a couple of months ago.

As far as volatility trading goes in India I think after the week, as long as the transition is smooth, that NVIX trading will probably switch over to the contango shape that more seasoned volatility futures markets are used to. At least until the market begins to anticipate the next big event like an election or major economic number.

Two Short Dated VXST Option Trades From Today – 5/12/2014

Last week as expiration approached for the May 7th futures and options based on VXST there was some activity that occurred on the Tuesday before expiration in the VXST May 7th 13 Calls. Paper was buying and selling those contracts as the underlying index and futures climbed over the 13.00 price level the day before expiration.

It appears that short term volatility traders were in the market again today with both bearish and bullish trades in VXST options occurring this morning.   To give some color to each specific trade I put together the chart below. This figure shows a 5 minute price chart of the S&P 500, May 14th VXST Futures, and VXST Index along with 3 points highlighting where a few trades in May 14th call options occurred. VXST VXST Fut SPX Monday


Number 1 shows where there appears to be a seller of 60 of the VXST May 14th 14.00 Calls at 0.10. This trade was executed around 9:20 Chicago time and is taking in a little premium and probably is an outlook that VXST remains under 14.00 into Wednesday morning.

Number 2 is a more bullish outlook for VXST where there was a buyer of 40 of the VXST May 14th 12.50 Calls that paid 0.15 for these options. If held to expiration these calls will result in a profit if VXST settles at 12.65 or higher.

Number 3 goes back to the bearish side and is another sale of the VXST May 14th 14.00 Calls at 0.05. As with trade number 1 this trade works out if VXST is under 14.00 at expiration when settlement is determined on the open Wednesday morning.

None of these trades were marked as spread trades on the tape, but it is always possible that either trade, selling the VXST May 14th 14.00 Calls or buying the VXST May 14th 12.50 Calls, was tied to so other trade or position.  The complementary positions could be VXST futures or even short dated SPX options. However, what can be gleaned from this activity is that some traders are finding short term opportunities using VXST options, even when those contracts have just a day or two left to expiration.  Tomorrow we’ll see if more traders show up with an outlook toward Wednesday’s VXST settlement price.

Last Week in VIX – 5/11/2014

The S&P 500 was quiet and VIX was quiet – that can pretty much sum up the week. The S&P 500 actually lost a little over 2 points and did so while staying within a high low range of just under 30 points. The VIX drifting around in the chart below is a reflection of this.VIX Chart


VVIX was getting a lot of attention as it came close to setting a new all-time low close last week. It also appears there were several call sellers in the market late last week which was the cause of the low VVIX level. I came across an interesting spread trade that went up about lunch time on Friday that is a cheap set up to benefit from a spike in volatility between now and June expiration. A trader sold 2,500 VIX Jun 14 Puts at 0.38, bought 2,500 VIX Jun 16 Calls for 0.97, and finished the trade up by selling 2,500 VIX Jun 30 Calls for 0.09 which sums up to a net cost of 0.50.   A payoff diagram depicting what the outcome would be at expiration appears below.  As always I highlight the closing prices for VIX and the appropriate future contract on the payoff diagram.


If held to expiration, which is doubtful but it is a certainty I can work with here, the trade is a loser below 16.00 with extra risk under 14.00 due to the short position in the VIX Jun 14 Put. Over 16.00 the trade looks good with things capping out at 30.00, again due to a short position, this time in the 30.00 Call. As mentioned before, VVIX is very low and historically the implied volatility of VIX options has moved higher with gains in the underlying index. That would probably be an added bonus for the long position in the VIX Jun 16 Call if there is any spike in volatility. This will be a trade I’m going to keep an eye on for the next few weeks and may revisit if there is a volatility spike between now and June 18th.

Finally, the VIX curve got a little less steep last week with May expiration approaching and very little action out of underlying index. With VIX basically unchanged. The May future dropped almost 6% and June lost 4%. This can be thought of as a sort of ‘time decay’ for the VIX futures as expiration approaches and the unchanged VIX last week makes it easier to isolate the decay on a chart.



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