This week’s 2.11% drop in the S&P 500 matches the worst week this year. The other 2.11% drop occurred when the S&P 500 came under pressure in mid-April in conjunction with the headline grabbing drop in the price of gold that week. What is different this time is that market volatility was a bit more attentive to the market drop this time. In April the intraday high for VIX was 18.20. Yesterday VIX managed to climb over 21.00 during the day before finishing the week at 18.90. This was the first time a VIX quote did not start with the digit ‘1’ since we almost drove over the fiscal cliff together. That almost seems like ancient history at this point.
The VIX option market experienced strong buy activity mid-week which pushed VVIX over 100.00 for only the fifth time this year. What is interesting about that 100 level is historically VVIX would run to 120.00 during times of panic. We have not seen that level since November of 2011. I wonder if maybe there are more spread trades now than there were a couple of years ago as opposed to pure buying of call options to try to benefit from higher VIX and the result of this balanced buying and selling is a lower range for VVIX.
In the VIX ETP space the very heavily traded iPath S&P 500 VIX Short Term Futures ETN (VXX – 21.56) put up record volume on Thursday with over 136,000,000 shares traded. Friday and Wednesday also were strong volume days for VXX with those two days experiencing volume that would rank in the top ten for VXX. I saw it stated on Twitter (so it must be true) that VXX was the second most heavily traded exchange traded product behind the SPDR S&P 500 (SPY – 159.07) on Thursday. I could not confirm this statement with 100% certainty, but on average VXX is in the top five of volume so that makes it close enough to include in this blog with a couple of disclaimers. VXX also finished the week 3.70% higher after being up over 7% for the week on Thursday. Thursday the front month July VIX future closed at a premium to the August contract. Friday the two changed positions and this sort of trading activity (front month at a discount to the second month) can cause a little headwind for VXX. If the S&P 500 continues to drop and VIX continues to rise then watch the July – August future relationship as VXX can benefit from another inversion of that relationship.