Just a Bit of a VIX Squeeze

Today the SPX finally broke its streak of not closing up or down 1%.  While that is certainly important to note, it is not the most important thing that happened today.  What most important is how flat footed a few trader got caught.  While the S&P moved, the VIX exploded.  The VIX moved from the low 11's to almost 15% in one day, in what turned out to be an exceptionally short period of time.


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VXN is Cheap, VIX is Not

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The VIX is trading around 12, which implies that the market is going to move about .75% a day, if it is priced perfectly.  In the last two days, the SPX has moved about .66% and over the last 10 and 20 days it has moved less than 7%


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Meanwhile the NDX moved more than 1% today and had moved on par with the SPX prior to that.  

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Tomorrow option headlines will talk about how the VIX 'popeed' almost 10% to over 11.33% today.  This will be a complete miss representation of what happened today.  Let us talk about a few important things to notice:

Tick chart - ^VIX - CBOE Volatility Index_window_screenshot_1.png

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1.  We were coming off a long weekend where the market closed for 3 1/2 days,  a normal VIX adjustment coming off that long of a break should be about 1-1.2% depending on how much Vega is in SPX options at the time.

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VIX Not Going Anywhere But Down

Currently the VIX futures are trading at a premium of less 1 point relative to the cash VIX.



With more than two weeks to expiration, this is a pretty light spread.  When taking into account that the cash VIX is in the 11's and the Future is 12.45 this is incredibly low.  Basically, traders think that a cushion of about .95 and a VIX future of less than 12.5 is plenty of spread to handle any upside risk in VIX.  Why?

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There IS some Underpriced Vol

I spent most of the day trying to find places where one could buy premium and have a reasonable chance of success.  The answer was not in equities, metals, or even in crude.  But there is an area where risk seems to be appropriately or even underpriced:  credit.  Take a look at this chart of TLT and its IV 30 vs HV 10 and 20.


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Don't Hold VXX to Track VIX EX# 1000505

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:


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SPX HV Near Historic Lows

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:

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VIX Creeping Higher, Vol, Not So Much

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


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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.

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13 SPX Points Doesn't Matter Anymore

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:


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The VIX is Expensive

Just because something is priced low, doesn't mean it's cheap.  Look at term life insurance, it costs almost nothing, but is NOT cheap because almost nobody collects on it.  The same can be said for the VIX.  In historical terms,  the VIX is priced at a low level, a level it could be at for a while.  Making matters worse, is that the VIX, while low,  is not NEARLY as low as actual market volatility.  Take a look at the chart below which shows 10 day realized volatility vs 30 day IV.

Chart - ^SPX - Standard & Poors 500 Index_window_screenshot_1.png

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