This Week in VIX and VXN

It was an interesting week for the US equity markets and also an interesting week for VIX and VXN. First, as everyone is aware, Hurricane Sandy resulted in the first weather related closing of the US equity markets in years. A piece was posted covering that sort of history earlier this week in this space –

On Friday the S&P 500 started out higher off what appeared to be a bullish employment report, but the rally was short lived as stocks took a dive closing near the low of the day. VIX started out the day very close to 16.00, but rallied as stocks dropped and closed near the high of the day. The stock market continues to hold the psychologically significant 1400 level. A VIX trader said VIX futures action was giving him some confidence in stocks not breaking through this level. His focus is on the November VIX future which settled Friday at 17.80 – a slight premium to the spot index considering November VIX expiration is not until the 21st of this month. This low futures premium relative to spot VIX indicates traders think there is not much upside for VIX over the next couple of weeks and subsequently believe there may not be too much downside for stocks.

VXN pricing is mirroring this bullish equity market forecast as well. Note the VXN curve below. I typically do not mark-up these charts, but wanted to highlight where November VXN futures settled relative to the index on Friday. The futures are at a discount which indicates traders (putting money to work) expect lower NDX volatility between now and November 21st. Forecasting a lower VXN means traders are subsequently foresting a higher NDX. We’ll know just before Thanksgiving how the market did on this prediction.

Finally, I posted a separate blog on VIX futures trading this morning and a review of other VIX related markets last night –