This was a strange week for the both VIX and VXN relative to their underlying markets. I spend a fair amount of time discussing the differences between implied volatility for index options and equity options. Typically equity option pricing is anticipatory and index option pricing is a reactionary. Think of equity option activity in front of an earnings report or new product introduction. Typically implied volatility climbs in front of an event and then sells off afterward. In the case of index option volatility, it typically reacts to price changes in the underlying market. We see this historically as around 80% of trading days VIX moves in the opposite direction of the S&P 500 and VXN moves in the opposite direction of the Nasdaq-100. However, this week things got a little turned around.
The table below shows the percent change for the S&P 500, VIX, the Nasdaq-100, and VXN on a daily basis last week. Note Monday and Tuesday VIX and VXN are both higher in somewhat dramatic fashion relative to their underlying markets. Thursday is highlighted as, although the respective markets were lower, both VIX and VXN were under tremendous pressure. This activity reflects equity market concerns in front of potential ECB and Fed activity early in the week and then a reaction to basically muted news mid-week. Friday was all about the employment numbers which pushed stocks higher and both VIX and VXN lower.
|SPX % Ch||VIX % Ch||NDX % Ch||VXN % Ch|
Finally, I posted a blog about VIX in early August Wednesday morning. As a reminder, of 22 August markets with VIX data since 1990 16 of those years saw a higher VIX on the close seven trading days into the month. Thursday of this coming week will be the seventh day and if historical odds prove true VIX should close over 18.93. Time will tell, but that’s a hike for VIX from the currently level of 15.64.
Also, if you have interest in the VIX options, Exchange Traded Notes, and Exchange Traded Funds I posted a review of those markets last night –