Yesterday the S&P 500 lost a little over 12 points and the VIX rallied accordingly moving from 16.27 up to 18.62, a gain of over 14%. That’s the headline number and what most market participants focus on when relating the VIX to a move in the S&P 500. However, there’s more to the VIX arena and there are other financial instruments that can give us an idea of the market’s outlook for volatility over the near term.
First, the August VIX Futures contract settled Monday at 20.80, up 1.65 from Friday. This is a rise of over 8%. Not quite as much as the jump in the underlying index, but still at a premium to the index. The VIX futures trading at a premium is typical of VIX futures trading. When the futures trade at a discount, this is an indication that the market feels volatility will be lower in the short term. This may also be taken as an indication that the overall market (S&P 500) is due for a rebound as there is an inverse relationship between the S&P 500 and the VIX.
Another indication of what is going on with volatility is the VIX of VIX (VVIX). This is the implied volatility of option s on the VIX index and the behavior of this index on Monday is of interest. The VVIX rose from Friday’s close of 100.61 to 107.32 (up about 7%) yesterday. Early Monday, with the stock market under pressure, the VVIX got as high as 113.45. What does this tell us?
The VIX is an indication of the implied volatility of SPX option contracts while the VVIX is an indication of implied volatility of VIX options. Typically the demand increases for SPX options occurs through purchasing of puts on days like yesterday and the result is a higher VIX. Days like Monday also have an impact of the VVIX, but due to increased demand for VIX call options. Market participants use VIX calls in the same manner as SPX puts – they are buyers when there is concern about the overall stock market.
Last week there were several reports of large buyers of August VIX calls with 23, 24, and 28 strike prices. With the rise in the VIX and August VIX Futures contract the buyers of these calls were seeing higher premiums. They also were not selling for a quick profit. The result – higher VVIX, but also large VIX call positions that are being held with the expectation that we will see lower stock prices between now and the middle of August. Whether or not these buyers are correct is yet to be seen.
Friday to Monday Chart of the Percent Change for VIX, Aug VIX, and VVIX –