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Weekend Review – Volatility Indexes and ETPs – 8/21/2016

For the second week in a row the S&P 500 Index related volatility indexes hardly budged. Three out of four were lower with the longest dated, VXMT, up slightly on the week.

VXST VIX VXV VXMT Weekend Review – Volatility Indexes and ETPs – 8/21/2016 at vixtrade.com

 

We’ve ranted and raved in various forums about how VVIX has been holding up despite a lower VIX. It was kind of like the last holdout for higher equity market related volatility until this past week when it took a 12% dive.  This puts VVIX closer to the lower end of the historical range. I guess we will now focus on SKEW which is the sole index that remains relatively high.

VXX Table Weekend Review – Volatility Indexes and ETPs – 8/21/2016 at vixtrade.com

 

 

Since the equity market bottomed in February both VXX and UVXY have given back all the early 2016 gains and then some. As long as contango prevails in the VIX futures term structure and VIX remains low we will probably continue to see SVXY widen the 2016 lead on the long funds.

VXX SVXY UVXY Weekend Review – Volatility Indexes and ETPs – 8/21/2016 at vixtrade.com

 

I’ve started looking beyond broad based equity market volatility in this space.  This week the biggest moves to the upside came from the currency focused volatility indexes. If something is getting ready to upset the financial markets maybe it is macro in nature and the heightened risk is showing up in $BPVIX, $JYVIX, and $EUVIX.

Volatility Indexes Weekend Review – Volatility Indexes and ETPs – 8/21/2016 at vixtrade.com

 

Finally, on Friday the CBOE Options Institute held the first of a series of focus classes. We spent the day covering all things VIX and Volatility with a great group of students. I actually like these sorts of classes because I always seem to come away with new things to work on based on student questions or comments.

One student noted that he likes to buy SVXY on any pull back of about 20% and this prompted another student to ask if he’d ever considered selling out of the money puts on SVXY. We fired up LiveVol Pro and took a look at the skew of SVXY options. A condensed version of that chart appears below showing the skew for SVYX options expiring on September 16th.

SVXY Skew Weekend Review – Volatility Indexes and ETPs – 8/21/2016 at vixtrade.com

 

SVXY finished the week at 73.44 and we kicked around different 60 strike SVXY puts. The skew chart above shows the IV for September 16th SVXY 60 Puts is around 80%. With volatility like that priced into options we looked at the bid side for all the 60 strike puts expiring in September. With Weeklys there are actually five alternatives to consider.

SVXY 60 Put Bids Weekend Review – Volatility Indexes and ETPs – 8/21/2016 at vixtrade.com

 

The premiums ranged from 0.35 for the September 2nd puts to 2.05 for the September 30th contracts. Of course this is the equivalent of being short volatility since a volatility spike can take 20% out of SVXY in just a day, but if a trader would be a willing buyer of SVXY on a dip to 60.00 the opportunity to get paid to do so exists since the IV is so high for out of the money puts on this ETF.

 Weekend Review – Volatility Indexes and ETPs – 8/21/2016 at vixtrade.com >

Weekend Review – VIX Futures and Options – 8/21/2016

VIX dropped a little as the equity market did a whole lot of nothing last week.  We retired the August contract on the open Wednesday morning and September took over as the front month.  With time to go to expiration (this is actually a five-week cycle) everyone seemed to notice the steep contango again.  What is interesting below is the behavior of the curve beyond October.  November and beyond gained a little ground despite all the contracts moving up in the pecking order of expirations.

VIX Curve Table Weekend Review – VIX Futures and Options – 8/21/2016 at vixtrade.com

 

At least one trader decided that there is a possibility of higher volatility over the next few weeks.  In a rarity there was a fairly large out of the money call buyer in the market early Friday.  With VIX a tad over 12.00 a trader purchased 60,000 VIX Sep 25 Calls in three lots paying 0.29.  The September VIX futures contract was trading at 14.80 when this trade came into the pit as well.

VIX PO Weekend Review – VIX Futures and Options – 8/21/2016 at vixtrade.com

 

 Weekend Review – VIX Futures and Options – 8/21/2016 at vixtrade.com >

The VIX is Low, But Should You Fasten Your Seatbelt?

VIX has spent the whole of August below 14, and remains – at time of writing – close to its lowest levels in two years.  But the present calm may be dependent on a short-term seasonal effect; and we are approaching the traditional period where it ends.

August is traditionally a quiet month for U.S. equities.  The usual deluge of corporate announcements, elections, and product launches attenuates to a trickle, while traders and investors decamp to their holiday destinations.  Then, in September and throughout October, the world returns to business, sometimes only then announcing or processing events that may have occurred over the summer.

The lack of news flow in August and subsequent ramp-up creates a seasonal effect in volatility, with VIX depressed over the summer months and rising through late August and early September.

The graph below shows the historical extent of such seasonality, plotting the average level of VIX in comparison to its one year trailing average at each point in the year.  The effect is not dominated by one or two outlier events, but instead appears persistent; the grey shaded area shows a similar pattern for the 25% and 75% percentile range of values.  Today’s value is well below the historical interquartile range as VIX is 30% below its average level for the past year.

Capture 420x277 The VIX is Low, But Should You Fasten Your Seatbelt? at vixtrade.com

Interestingly, there is a clear seasonal lull between late June and early August, and a significant increase towards the end of August.  The 35th week of the year showed, on average, the biggest rise in volatility.  Given that we are presently approaching the end of the 34th week of 2016, investors might wish to bear this history in mind.

 The VIX is Low, But Should You Fasten Your Seatbelt? at vixtrade.com >

Focus on VIX Class to be Hosted at CBOE Options Institute

The CBOE Options Institute is hosting the first in a series of classes that will focus on different aspects of option and volatility trading. The first class, appropriately named Focus on VIX and Volatility Products, will be held on Friday August 19th at CBOE. For those unable to make it to Chicago the class is also available online. Specific topics to be covered include

  • VIX and the behavior of volatility indexes
  • VIX futures and options price behavior
  • Trading VIX related Exchange Traded Products
  • Long, short, and neutral volatility strategies

In addition to CBOE instructors, Mark Sebastian will be on site to discuss his approaches to trading VIX and from noon to 1:00 we will be broadcasting an episode of Volatility Views on the Option Insider Network from the CBOE Classroom.

The options institute instructors will also be available to answer questions about all things related to using volatility as a tradable asset. As an extra bonus all attendees will receive a copies of Option Strategies for Advisors and Institutions as well as Volatility Trading Strategies (scheduled to be published in the fourth quarter of 2016) by Russell Rhoads. Early bird pricing for this class ends this coming Friday August 5th..

 Focus on VIX Class to be Hosted at CBOE Options Institute at vixtrade.com >