Some normalcy returned to the volatility world last week as VIX and VXN acted more like it was ‘suppose to’. A lot has been said lately about VIX being ‘broken’, which I do not fully understand. VIX is a quantitative measure of the implied volatility of SPX option prices. As Europe is on vacation which has been the source of many negative headlines that put short term pressure on the S&P 500 (and result in a higher VIX) the demand for SPX options has been relatively low. Add in the basically quiet earnings season that is behind us and you get low near term market risk. Low near term market rise = a low VIX. Not a broken VIX.
With the S&P 500 rising 1% on the week VIX dropped 5.75% to 14.74 which is the lowest VIX since March this past year. The curve of VIX futures prices has a typical shift and near month futures dropped close to the same level as VIX, while farther dated contracts moved lower in price, but not nearly as much as the closer contracts.
The NASDAQ-100 rose 1.75% outpacing the S&P 500 by 75 basis points. This bullish move in the tech heavy NDX resulted in a dramatic 9% drop in VXN to 15.89 which the lowest close since April 2011. There is very high correlation between VXN and VIX. As of late there has been a bit of a disconnect between VIX and VXN with VXN at a higher than average premium to the more established VIX. For 2012 the average premium of VXN versus VIX has been 1.44. This week’s price action takes VXN to a small discount to this average with the spread being 1.15. The chart below shows VXN versus VIX for 2012 –
The VXN futures curve acted as expected with contracts dropping, but not as much as the index. Basically we saw a normal shift in these prices.
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 –