We all know the VIX has been in a range for some time. This blog has on several occasions argued that it may be that way for a while. Yet, even with the relatively stable and lower VIX traders have been pointing toward the 'vol of vol' for high option premiums. This is a somewhat flawed argument. Yes the VIX options do expire into a cash settle, but the real underlying is the VIX futures which are less volatile than the cash market even some of the more advanced programs look at HV in terms of cash VIX instead of the futures.
Based on how much things are moving around in the cash, VIX option premiums are at some of the most expensive levels I have ever seen. Take a look at the relationship of 20 day HV and 30 day IV in VIX options.
Somewhere between the ADP report on Wednesday and today’s NFP report the nation found a bunch of jobs. The broader markets also found themselves in record territory with NASDAQ making at least multiyear highs. What I find heartening (for bulls like me) is that the Treasuries are finally weakening with a near 3 point drop today. If the rally has to continue folks need to stop running to no-yield bonds. With better jobs news the need for the Fed to buy more is a much tougher case to make. The thing is we have .75% gaps in the SPX still and while the realized volatility has tailed a bit we are getting one to two days a week of bigger moves.
The last two weeks have been interesting for VIX and VIX futures watchers, for several reasons. In relation to the VIX, the realized volatility has been above implied for about 2 weeks and appears that it might stay there for a while.
With the underwhelming ADP report the private sector is just limping along but improving slightly. At some point here now that stocks are near all-time highs the residual of the financial crisis ending can only propel things for so long. I mean that as earnings have climbed back up over the last 4 years stocks have had just fits and starts depending on larger macro issue (US debt rating, Euro, US Fiscal Cliff, Europe, Europe, etc) . 2012 was nice but 2011 was a wash as investors worried about the Euro. Now lower interest rates are powering stocks globally. For some reason that is not enough to jumpstart hiring by companies. My only guess at this point is the continuing government dysfunction is worryin
One topic that consistently confuses people is VIX curve structure. It’s not just the level; it’s the slope that matters. Let’s look at two curves with very similar underlying VIX prices. I the difference might be more clear.
On March 21st, 2013 the VIX closed at 13.99, a mere .30% lower than where the VIX is trading. Also a very similar number of days to expiration across the different contract months relative to where we are trading today. Notice the slope of the curve in the front two contract months:
The SPX had a very ugly day today. Yet, I think this might be a short lived move. While the tragic Boston Marathon attack throws a small wrench in how the market might act in the coming days, I think the VIX is pointing toward a short lived sell off.
Take a look at how the VIX moved today and take note of how little it moved relative to theItalian elections, a day where the SPX moved LESS than it did today.
One thing that is really interesting is how high realized volatility is in the VIX right now. While VVIX might be elevated, it actually pales in comparison to where realized vol on VIX cash is (even if the futures haven't been moving):
What causes this? One major thing to remember about volatility is that it represents standard deviations. The lower the price of the underlying, the lower the standard deviation should be. The VIX has, as you should know by now, really fallen off.
One of the mistakes that sends many traders to our option mentoring is the trading of VXX. Shockingly there are traders that think this ETN should perform the way the VIX performs. This is clearly NOT the case. Today the VIX closed 14.39 up 1.03%, the VXX on the other hand closed unchanged to 21.58. VIX is up a touch less than a point from the open on Monday. VXX is actually DOWN from that open on Monday. We can actually see the differences in a visual tick by tick chart of VIX and VXX.
One of the things most options traders watch is what the VIX curve looks like. It's not just the overall shape that matters, it's how steep the curve is, much like skew. Last month at this time, the VIX was trading at 13.7. The Feb future was trading 14.35, a premium of about 5% to VIX cash. This is about normal, and points toward a market that is somewhat efficient and comfortable with VIX levels. The VIX futures ended up settling 13.07.
Today, the VIX settled 12.25, while the VIX future settled 13.20, a premium of near a full point. This is a premium to cash of closer to 10% than 5%. In fact, the enter curve is trading at huge percentage premiums relative to the norm. You can see the two curves next to each other below.
One of the interesting things to watch, that I think shows how jittery this market is, despite the rally, is the actual volatility of the VIX. Over the last 10 days, the Vol of VIX (not VVIX) has been near 220%.