If a market observer was given one piece of information – that the VIX was dropped from 16.70 to 15.64 this past week they would assume the S&P 500 must have been strong this past week. However, even with the strong market on Friday the S&P 500 only gained a tad over 5 points on the week or 0.36%. Events of the week weighed on the VIX which caused this sort of disconnect between expected S&P 500 and VIX relative performance. These two indexes moved in opposite directions, but the over 6% drop in the VIX was a bit surprising relative to the slightly higher S&P 500 this week.
On Thursday the S&P 500 was under tremendous pressure most of the day before regaining some ground in the afternoon. With the market under pressure the VIX was lower as well for most of the day. This was perplexing to many market participants. The best answer I got on this action was from Mark Sebastian at Option Pit who stated a lot of ECB risk had come out of the market and the result was pressure on the VIX, regardless of what the S&P 500 was doing. There’s some good logic to this and it could be taken in to consideration as to the differences in performance for the full week.
In VIX options one of the bigger trades involved the VIX Aug 23 Puts and was a closing transaction. With the VIX and August VIX futures trending lower, a holder of a large number of contracts was coming into the market and selling to take a profit. On Friday, even though the VIX was down to a 15 handle again, the buyers of out of the money calls did not appear to be there in size as they have been on previous occasions. The selling of these puts resulted in pressure on the VVIX (VIX of VIX) which was down almost 10% on the week from 93.08 to 84.50. The range for VVIX in 2012 has been a high of 117.44 and low of 83.79. This week’s action puts the volatility of VIX options almost on the low of 2012.
In the exchange traded product area the long VIX ETPs were all lower as would be expected. The hedge products were mixed with EEMV higher and USMV lower. The EEM exchange traded fund was up over 1% this week so that outperformance relative to US stocks contributed to the divergence. With the VIX lower the inverse ETPs had a strong week both finishing higher.