Of the four volatility indexes on the term structure chart below two have been around the longest. Of course VIX with the other being VIX3M (formerly known as VXV). The relationship between the 1-month volatility index and 3-month version usually has VIX at a discount to VIX3M. Friday this relationship flipped for the first time since April of last year. It is considered a sign of fear being ‘overdone’ when VIX is higher than VIX3M. We shall see next week if the fear is overdone or not.
TYVIX is still elevated, but lagged the equity volatility moves last week, even with a 1% drop in TY futures. Note VVIX and SKEW both strong in sync with the VIX move from last week. People are still paying up for protection against a bigger drop in equity prices through purchasing OTM SPX puts or VIX calls.
The volatility space was mostly green last week, individual stocks and a couple of currencies were the only losers.
Late Friday VXX was at 32.92 and one trader decided we won’t see massive follow through to the upside in volatility next week. They sold 200 VXX Feb 9th 40 Calls for 0.57 and purchased 200 VXX Feb 9th 52 Calls for 0.18 resulting in a credit of 0.39.
The short strike (40.00) is slightly more than 20% higher than where VXX was when this trade was executed. VXX has been around for 470 weeks since launched in early 2009 and it has rallied more than 20% only 14 of those weeks. We’ll see this time next week if next week is the 15th 20% plus rally or not.
We got an interesting move in the VXST – VIX – VIX3M – VXMT curve last week. The short end moved higher despite a nice bullish move out of stocks. The volatility market has been a bit jumpy like we are bracing for an unforeseen spike. We’ll see if the nervousness is justified.
I’ve been keeping a close eye on TYVIX since the bond market has been discussed pretty frequently in the financial press lately. Until it starts to move I’m going to consider the talk nothing to get excited about. Just for perspective, the long term range for TYVIX is from a 3 to an 11 handle.
Pre three-day holiday weeks usually have more volatility indexes down on the week than appear below. The currency markets were by far the leaders which means this may be the place to explore for trades that require some price movement.
Early Friday, with UVXY at 8.62, a trader came in with a low cost trade gaining positive exposure to any potential ‘volatility event’ next week. They specifically sold the UVXY Jan 19th 8 Puts for 0.09, bought the UVXY Jan 19th 10 Calls for 0.16, and then finished things up by selling the UVXY Jan 19th 12 Calls for 0.09. The net result is a credit of 0.02 and a payoff that looks like the diagram below.
This trade is fine as long as UVXY doesn’t move below 8.00 next week. Of course the goal is a huge move to 12.00 which if held through expiration places the profit at just over 2.00.
The volatility index price action relative to the equity market price action was pretty interesting last week. The S&P 500 was higher, as were three of the four volatility indexes calculated using S&P 500 option pricing. VXST was lower, but that is very common before three day weekends due to the calculation methodology (calendar days) when we have the market closed for three days.
VVIX stays over 90 and moved up a bit last week and TYVIX moved nicely off closing at an all-time low on the previous Friday. The long funds suffered a bit despite VIX moving higher as a reminder that VXX is not VIX.
Usually the holiday season with the extra days off results in volatility indexes suffering a bit of a head wind. I was surprised to the point of double checking numbers before posting the table below as I would have expected more indexes lower than higher last week.
UVXY hasn’t had a very good 2017, which is being polite. At least one trader thinks UVXY will not be gaining any of the losses back next week. With 2 minutes left in the day and UVXY at 10.10 a trader sold 600 UVXY Dec 29th 10.00 Calls for 0.43 and then purchased 600 UVXY Dec 29th 12.50 Calls for 0.14 taking in a credit of 0.29.
Note in the payout diagram above, UVXY only needs to drop 0.10 or more. Considering that UVXY dropped 36 of the last 50 weeks and the average weekly performance being down over 4%, this trade makes some sense. Barring a year end volatility event things should work out as hoped for this trade.
Friday was a huge day for US stocks with broad based indexes rallying nicely. The result was pressure on the SPX related volatility indexes which pushed them from up on the week to having a losing week.
Friday’s price action put pressure on the long ETPs and pushed the short ETPs (XIV and SVXY) to even higher levels. Both have now more than doubled in 2017. VVIX remains elevated which indicates the VIX call buyers haven’t completely gone away. TYVIX managed to close at an all-time low on Friday as we got past the FOMC.
A large number of volatility indexes quoted by Cboe dropped last week. Two individual stocks (GS and IBM) and VVIX were the only gainers.
On Friday there was one trader that appears to be looking for a volatility event this coming week. With UVXY at 10.62 they purchased 100 of the UVXY Dec 22nd 14 Calls for 0.11. In order for this trade to make money at next Friday’s close UVXY needs to rally about 32.8%. I’ll discuss this a little further below the generic payoff diagram.
I’ve been doing some work on all the volatility linked ETPs and have calculated the rolling 5-day performance for these products going back to inception. For UVXY I broke things out into 5% performance buckets and a bar chart representing this appears below.
Note on the right side of the diagram I highlighted all instances where UVXY was up 35% or more (which would result in a nice trade outcome for this call purchase). It turns out that despite 32.8% being a pretty large number, about 4.7% of 5-day performance observations resulted in a move of 35% or more. I’m not saying this trade will work out, but about 1 out of 20 times in the past the UVXY price action has resulted in this sort of short term out of the money call purchase resulting in a profit.
Of the four volatility indexes based on SPX option pricing, only VIX was lower last week. This is the second week where the longer dated indexes (VIX3M and VXMT) rose while VIX was lower.
Despite VIX dropping the long ETPs gained ground last week. This is a great lesson in what these products give you, exposure to VIX futures and both the November and December contracts rose slightly despite the drop in VIX.
Of note on the table below is the majority of green lines versus reddish lines. It’s been rare in 2017 that more volatility indexes rise than drop on a week over week basis.
On Wednesday VXX spent some time above 38 and when the popular ETN was around 38.50 someone came in and decided the move wouldn’t run to the low 40’s through the end of the week. Specifically there was a seller of the VXX Oct 27th 42 Calls for 0.51 who purchased the VXX Oct 27th 45 Calls for 0.26 and a credit of 0.25. The risk here is VXX over 45.00 and a loss of 2.75. However, there wasn’t much danger of this happening as VXX turned to the downside shortly after this trade.
The short term volatility indexes (VXST and VIX) were up a bit last week as the S&P 500 set multiple all-time closing record highs last week. VIX3M (formerly VXV) and VXMT were both up slightly resulting the rare ‘term-structure twist’. It’s really not that rare, I just had a nature documentary voice in my head as I typed that.
The table below has few surprises (beyond VXST and VIX higher). TYVIX heading to higher levels is a bit of a head scratcher until I notice the December FOMC meeting is sneaking up on us. It’s difficult to think the December meeting is around the corner when it’s 75 degrees in Chicago as I type this. Finally, worth noting is SKEW rallying to near all-time highs as the S&P 500 did the same.
Across the volatility universe most indexes were lower. IBM and Goldman Sachs volatility on the bottom of the table is a great reminder than not all volatility markets are the same. Looking at the top end of the chart the words, ‘mixed bag’ popped into my mind.
As mentioned already, we experienced a short-lived volatility spike Thursday morning, this sent me looking for traders using options on volatility linked ETPs to take the other side of this move. With VXX up around 35.60 a trader came in and sold the VXX Oct 20th 34.00 Calls at 1.68 and purchased the VXX Oct 20th 36.50 Calls for 0.31 and a net credit of 1.37. The payout at expiration (Friday’s close) shows up below.
This turned out to be a well-timed fade of the volatility move that lasted about 45 minutes. VXX finished the week at 33.79, 0.21 under the short call strike of 34.00 which places it a perfect place for this bear call spread as both options expired with no value.
There are lots of articles floating around discussing the lack of volatility in the markets along with the low level of VIX. It’s reaching a point where we don’t have much else to say and are just waiting for a change of scenery. With all that going on, the four volatility indexes based on SPX option pricing remained low and on average were basically unchanged last week.
There is a single data point standing out on the table below. That is VVIX in the upper 90’s. Despite VIX being at such low levels for such a long time, there is strong demand for VIX options, especially on the call side of the board.
Short volatility dominance continues with SVXY up 127% for the year and both VXX and UVXY are down dramatically.
Across the suite of volatility indexes quoted by CBOE several rose last week, earnings season is putting some upward pressure on the individual stock volatility indexes. Silver, the Euro, and EFA (Developed markets outside of North America) were all leaders.
Late Monday, as VXX was spending a little time over 38.00 a trader used Weekly options to take a stand that the early week strength in VXX would not last. Specifically, they sold the VXX Oct 13th 38 Calls for 0.88 and bought the VXX Oct 13th 50 Calls for 0.11 taking in a credit of 0.77.
Since these options expired on Friday I can show the full outcome of the trade (if held through Friday’s close). VXX finished the week at 35.34 well below the short strike of 38.00 which places it safely in the profit zone.
On a week over week basis the S&P 500 was down fractionally. One would not assume such a small move from SPX when looking at the VXST – VIX – VXV – VXMT curve below. VXST and VIX made nice moves to the upside while the longer end of the curve moved up a bit less resulting in a slight flattening of the curve.
The long funds that focus on the first and second month futures were up slightly while the short funds were down slightly. SKEW and VVIX both moved up nicely last week which should be encouraging for volatility bulls or equity market bears.
The three funds that represent long (VXX), daily double long (UVXY), and daily short (SVXY) have had very divergent performance this year and last week didn’t really change much on the year to day performance below. SVXY did manage to top up 100% early in the week before falling off a bit.
The majority of volatility indexes quoted by CBOE were higher last week. If it weren’t for earnings from GOOG, IBM, and AMZN which resulted in a volatility crush in options on those stocks there would probably be more green on the table below.
Early Thursday, before volatility finally started to get moving someone came in and bought a large number of out of the money VXX calls with an outlook that appears to hope for an overdue volatility spike between now and September 15th. With VXX at 11.00 they purchased just over 2500 of the VXX Sep 15th 15 Calls for 0.34. Note about a 40% move is needed for this trade to break-even at expiration, for most markets that’s unheard of, but not in the volatility world.
We only have data going back to the 2007 – 2008 period for the non-VIX SPX related indexes on the diagram below. VXST, VXV, and VXMT all made all-time lows, based on the history we have to work with, on the close Friday. VIX closing at 9.51 was the third lowest on record. However, the two instances of lower closing prices for VIX occurred on December 22nd and 23rd of 1993 (9.38 and 9.41). In December 1993, the 24th was a market holiday as Christmas fell on the 25th. Also, options expiring on January 21, 1994 dominated the VIX calculation as there was just under 30 days left until that expiration. There were three market holidays between the days where VIX closed lower that this past Friday and the third Friday of January. We know holidays take a little bit out of VIX, we see it every December and often before three-day weekends. Since there are no holidays between now and the two option series feeding into VIX (August 11th and August 18th) I’m going to say the VIX closing price on Friday counts as an all-time low, with an asterisk followed by the previous explanation.
The week was tough for long funds and good for short funds. VMIN continues to have a great 2017 and added over 11% to that year. VSTOXX is low which contributed to over a 9% move in the upstart EXIV ETN. Finally, TYVIX is testing all-time lows at 3.75.
SVXY is on path for an easy double in 2017 as long as we don’t get a catastrophic market event in the next few months while VXX and UVXY performance continues to languish. As a quick reminder, UVXY is set for a reverse split this coming week.
The table below shows how volatility is under pressure across the board. VXIBM and VXAZN moving up are both a function of a pending earnings announcement. GVZ snuck in an all-time low in late June, which I missed, and at 11.11 is amazingly low when you read about geopolitical issues.
As the trading week had about an hour left and VXX was trading at 12.01 someone came into the VIX Pit (VXX options trade there too) with a bullish VXX trade that has a pretty interesting time-frame. The trader sold the VXX Sep 1st 14 Puts for 2.54 and bought the VXX Sep 1st 12.50 Puts for 1.34 and a net credit of 1.20. The risk for this trade is 0.30 if VXX is at or below 12.50 on the close September 1st. Basically, for this trade to make money we need a volatility event (or two) that pushes VXX up to around the short strike prices of 14.00. The payout diagram below shows the payoff at expiration, but also includes a half way to expiration line since I believe our put spread seller would be inclined to take profits on any sort of volatility spike.
I’ve been traveling like a madman on behalf of CBOE in June. I try my best to keep up with the markets when I’m out and about, but sometimes the catch up occurs outside of real time. This weekend is one of those catch up weekends. I was aware of the VIX move over 15.00 (who wasn’t?) and that VIX was a bit higher than it had been for most of 2017 to finish the week. What surprised me was the level of VXST on Friday.
VXST is a measure of 9-day volatility expectations as indicated by short dated SPX option contracts. When we have holiday weekends VXST tends to come under a bit of pressure since there will be an extra day without trading figuring into the calculation. Hence my surprise when VXST was elevated as much as it was on a week over week basis on the VXST – VIX – VXV – VXMT term structure chart below.
TYVIX up 20% stands out on the table below which is probably a function of last week’s VIX spike being somewhat central bank oriented. VXX was higher, but VXZ lost a bit of value. As a reminder VXX owns the front two month VIX futures while VXZ is long months 4 through 7. The short end of the VIX curve was higher while the long end was lower last week.
We ended the first half of 2017 on Friday and the result was VXX down just a rounding error less than 50%. SVXY has a stellar six months as short volatility strategies have ruled in 2017.
The FANG stocks have been in the news off and on lately due to some pressure which I’m going to attribute to profit taking or more willing sellers than buyers (both are silly statements, I know). Whatever the reason, the option markets on the FANG (Facebook, Apple, Netflix, Google) have been very active and we have an example of this as VXAPL and VXGOG were the leading gainers last week. Price action plus earnings season being around the corner contribute to the strong moves in the individual stock volatility indexes.
VXST was slightly higher while the rest of the SPX related volatility indexes dropped last week. All moves were relatively small as we have truly entered the summer doldrums, at least for broad based index volatility.
There’s very little exciting on the table below. TYVIX bumped up slightly, but is still at very low levels. VVIX remaining over 80.00 is interesting as traders may continue to take advantage low VIX to get long volatility exposure through buying calls or spreads that put some upward pressure on OTM calls.
We are at almost the mid-point for 2017 and short volatility has ruled the year. SVXY is up over 80% while VXX is down a little over 50%. When a fund loses 50%, you need a 100% gain to get back to flat. Don’t count VXX out for the year as the underlying index gained over 100% in October 2008. I’m not predicting that sort of action again this year, but just noting it has happened in the past.
I mentioned equity index volatility was tame, but that doesn’t mean all volatility was boring last week. Headline price action in the oil market resulted in nice gains for OVX and VXXLE. VXGS was the leader of the pack last week which I’m going to attribute mostly to earnings, but also to some bullish option activity that keeps popping up in the financial sector.
Any strength in VXX this past week came on Tuesday. Mid-day VXX was around 12.95 and a bear put spread was executed when the VXX Jun 23rd 13.00 Puts were purchased for 0.31 and the VXX Jun 23rd 12.50 Puts were sold for 0.07 resulting in a net cost of 0.24.
This trade was nearly perfect as VXX finished the week at 12.54, just 0.04 above the short strike. Of course, it is very possible our trader exited this position early, but even if that were the case I bet they were happy with the outcome.
As the week came to a close VXST which measures 9-day volatility expectations took a dive. Hence the big drop on the left side of the VXST – VIX – VXV – VXMT diagram below.
TYVIX finished the week below 4.00 which was a first for 2017, but not outside of the long term historical range. I checked the market expectations for the next FOMC meeting in late July and right now we have a 100% chance of nothing happening. That much certainty probably justifies such a low volatility expectation. Skew worked a little bit higher last week and VVIX was little changed which can be considered indications that there is at least some concern about the future direction of stocks.
The long funds continue to experience a dreadful year in 2017 while SVXY will probably be near the top of many mid-year performance charts in a couple of weeks which always brings new (neophyte) investors into this space. Of course the first 20% pullback will scare many away at what has historically been the best time to purchase a short volatility fund like VMIN, SVXY, or XIV.
With a couple of small exceptions the volatility indexes quoted by CBOE were mostly lower last week. I see no pattern in the mix of indexes that rose so it’s tough to attribute the green changes below to anything other than market randomness..
I guess the trade below is a version of Monday morning quarterbacking (post-expiration perfect trade fitting?). The only life VIX really experienced last week came on Monday, which also pushed VXX higher for the day. As the end of the day approached a trader came in and purchased 100 VXX Jun 16 13.50 Puts for 0.40 combined with selling the same number of VXX Jun 16 13.00 Puts for 0.14 and a net cost of 0.26. I admitted as I started discussing this trade that I was benefiting from hindsight and we can see this trade was perfect based on where VXX closed Friday.
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