In 2008 we saw the market in backwardation for weeks. At a certain point, the VIX finally started to ease and moved back toward 40, then 30 then 20, then finally about 10. The OIV has been above 45 for WEEKS! The question now is, how long will this last? History says that high vol doenst last for more than 6 months. We are getting close to that.
I think we can all agree that the 1st quarter of 2015 has had its fire works. We have seen the OIV (the oil VIX explode higher). We have seen the VIX itself average well above the average of the last two years (both 14.2%). However, I think the index that may be the most telling of the next quarter is EVZ, the EuroCurrency Volatility Index. VIX and OIV while elevated and high respectively have at least found a range. EVZ appears to be in the entering a stage similar to OIV in October
One thing that I always find interesting is how much the Chairperson of the Fed can drive no activity for an entire day. Today, with Janet Yellen speaking 15 minutes before the close, the market held a 5 point range for over 3 hours straight. Yet, before she even began speaking the VIX started to drop. In fact, buy the time she started VIX had essentially priced itself, and any vol selling that was done was quickly recovered. Notice the movement after yellow circle where Yellen starts talking:
In the last 2 days the market has given away about 45 points, a nice move north of 1% a day in terms of movement. Yet, take a look at the price action of SPY and VIX over the last 5 days (since Thursday).
But Boy was our Founder Spot on:
It should say BINGO!
Today the Fed announced that they are dropping the word patient from their statement, at the same time they announced they are patient. The net result was a pop in both short and long term bonds and a strong move in long term interest rates. In addition the Fed Fund Futures are now picking September or October for a rate hike (that might not even come then). The net result was that every 'crowded trade' got smoked except one, the VIX futures. Take a look at the curve:
If the last week has taught us anything its that the VIX might have itself a price whether the SPX goes up or down. Yesterday on the heels of a huge rally, the VIX barely moved. Today, in the middle of a decent sell off, the VIX was much the same. This basically means that traders feel like they have the vol of SPX options priced ahead of the Fed. Which also means that after the announcement the VIX could go back to the circled area below
While the story of the day was the 8.6% sell off the VIX (if you read the blog you understand the humor behind the last statement), the real blood bath was not in VIX itself but in its options. VVIX, the VIX of VIX got CRUSHED. The index dropped just under 8% (in actual percentage points, not in percentage terms) today, in percentage terms (which is stupid) its about the same as VIX. The difference is that VVIX was trading at 97% when it dropped that much, an actually significant drop in IV terms.
One of the things that has been throwing off the VIX, VXX and XIV contango traders has been how the VIX has been moving. Where in October and December we saw VIX swing back and forth some, since the beginning of January VIX moves have not involved alot of backwardation. Instead we are seeing moves in parellel: esentially the whole curve is moving as one unit. Take a look at the movement we have seen week over week in VIX: