Just about every source has written about how, the VXX is what we thought it was: a good way to day trade volatility and a terrible vehicle for tracking the VIX. We have written about it multiple times. , Bill at VIXandMore has, Jared at Condor Options has, actually just about everyone has. However, very rarely do we get such a clear example of how the ETN fails as a multi-day VIX tracker than we saw over the last two days. Take a look at this chart:
With Syrian warplanes getting into the mix stocks took a slight pause today. Between Syria and Iran the ISIS militants have found a more able adversary. Early in the session the NDX was moving into some lofty ground but by the end of the day started to head into negative territory. The only names still up were Treasuries and the volatility products.
If one were to look back at the last 20 days of trading and compare it to the previous 10 years, one would be looking at just about the least movement over that 20 day period over the last 10 years. In fact it would be one of the slowest periods ever. Once today is included in the number, expect realized volatility which in TD has measured around at 3.4% and in Livevol at around 5.4% to drop to about 3.25% and near 5% respectively. Regardless of the HV measurement, both would have to be considered just about the lowest measured level in the last 10 years. The only period that comes close was around January of 2010. Take a look at how things have fallen off:
There has been an astonishing ammount of call option volume in many utility stocks over the last few days. Traders have bought upside calls in SO, ED, AEX and many other major utilities. Where we have not seen the same action has been in the ETF for utilities. Check out today's action and overall open interest in XLU.
The big action today was in the price of gold. Stocks managed to eke out a new high but gold was really the kicker. Maybe the threat of inflation is back in the game but gold for sure was up around 3.5% today. We had looked at gold volatility in the Option Pit Chat this week and we thought it looked cheap. The 10 day straddles were pricing a 2.10 move and the move today was 4.27. So much for the implied volatility being correct.
The Fed is staying the course and winding down their bond buying program. We have some higher short term rates but lower long term rates on the horizon as growth is better but still slow. That is exactly what the Fed wants. Slow and steady wins the race and for now stock like the news. Maybe we can catch a bit more rally if we can put the Middle East genie back in the bottle. For now VIX is taking a thumping as the good economic
As we move into the FOMC minutes release VIX is down around .43 today to 12.21 at midday. In reports past the VIX has generally held steady up to the report but 2014 is starting to look different. The FOMC is probably going to continue to exit their bond buying routine and let the economy stand on its own. They might even signal rate hikes sooner. With the inflation report today it would seem the market wants some inflation.
The FED has its next interest rate announcment coming up on Wednesday afternoon. While it is likely to be a non-event, that does not stop the market from pricing in some risk (as it should). Thus, over over the last few days we have watch the VIX slowly creep higher from a low below 11 to now approaching 13%. The pattern is clear
Notice the clear pattern higher. The funny thing is that the patern in realized volatilty is the complete opposite of the pattern in the VIX. Notice how both 20 and 10 day HV are now hanging around silly low levels.
As we move into the end of the day, the week is punctuated by a real bout of weekend risk. Namely what will happen in the sands north of Baghdad as bad guys once again try take over a country? The Middle East has had their share of crises over the last decade but this one will be noteworthy for the lack of follow through on the part of the volatility markets.
If one throws a frog in boiling water, the frog will immediately jump out. If one puts a frog and slowly turns up the heat, the frog will boil to death because it won't recognize the change in heat in time to jump out of the pot. That seems to be the way traders are treating 10-15 point moves in the SPX. When the SPX was was in the 1100's or 1200's (way back in 2012) a 15 point move was about 1.25%, the equivalent of a VIX near 20%. Take a look at how big today's 13 point move was in percent terms: