The S&P 500 lost a little over 1% this past week and VIX rallied just over 12.5%. 12.5% is an impressive number, but VIX under 16.00 is not quite an indication that market participants are fearful of a near term drop in the equity market. Of course many market participants have been waiting for some sort of shoe to drop that would result in a market pull back for some time and they are probably tired of either being wrong or of waiting for ‘something’ to happen that results in quick pullback in the S&P 500.
VIX option activity told an interesting story in a couple of ways last week. The contracts that experience large institutional trading activity are usually based on where we are on the calendar relative to VIX expiration. That is the front month (October until the 17th) is where we will see the big trades that catch our eye. Then as expiration approaches, the big trades are a combination of positions being rolled out to the second month (November at this moment) or new positions being established in the second month. This past week we did see some October trades, but there were several November positions being established, a bit earlier than a savvy VIX trading observer would expect. This may be interpreted as traders not being too concerned about the next couple of weeks, but having an expectation that volatility may spike up after mid-October, but before mid-November. I’m not sure, but I think there may be an election in that time period.
Another interesting piece of data that caught my eye was the lack of rally in VVIX when VIX was moving up later in the week. This actually matches up with the point made in the previous paragraph. VVIX is calculated using the front two month option series. In addition to November positions – some positions that are based on an anticipation of higher VIX later in the year or in early 2013 are being established. This demand for VIX calls would not have influence on VVIX. Again something that says traders are not concerned about the near term, but concerned about late 2012, early 2013 for equity prices.
In addition to VIX options, options on the ETPs are also traded at CBOE. In a mid-week discussion with a market maker in these instruments mentioned he was seeing a usual amount of farther dated out of the money call option buying on the long volatility ETPs this week. This is a third indication that the VIX market place expects near term calm, but over the long term higher volatility.
Finally, a shameless commercial announcement –
Wednesday afternoon I will be participating in a webcast that introduces the basics of trading VIX. Since it is free I guess this is not too shameless – more information can be found about this event through the link below –