Today was a heck of a day in the equity markets. We got our biggest on day S&P 500 drop in a few months and the first down month for the S&P 500 since January (I bet you forgot the January Effect indicator was bearish for 2014 – I admit I did). The result was a spike in VIX, VXST, and moves higher in all other equity market related volatility indexes. Here are a few of the highlights (or low points depending on you were positioned coming into the day).
The CBOE Volatility Index –
VIX moved up over 27% which was the third biggest move to the upside in 2014. The front month future was up just over 12% and finished the day at a discount of 1.75 points to the spot index. If you throw spot VIX out of the equation, the term structure chart is actually in contango, which could be taken as a bullish signal for the equity market. The market has become conditioned to expect any spike in volatility to be short lived and that is apparent when you look at the blue line below, of course excluding spot VIX. A couple of weeks ago VIX moved up by over 30% in a single day, but was back down below 12 in less than a week. That is the sort of pattern that traders have come to expect and may explain the August discount to spot. Keep in mind we have an employment report tomorrow that probably has some market participants nervous. Looking at the August VIX future price today I would say those that are nervous into tomorrow’s number are in the minority.
Unofficially, today’s VIX futures volume came in at 364,811 contracts which would make today the sixth busiest day on record for VIX futures trading. Also, unofficially, it appears that the average daily VIX futures volume for July was just over 196,000 contracts which would make July the fourth busiest month for VIX futures trading based on that metric.
The CBOE Short Term Volatility Index –
VXST was up almost 50% on the day for the ninth biggest single day move since the data was complied. The August 6th VXST future was up over 26%. With only three trading days remaining until expiration the August 6th contract followed VXST higher, but is still at somewhat of a discount. Like with the VIX curve, there seems to be some apprehension as to whether this move down in the stock market is going to continue.
VXST – VIX – VXV – VXMT Term Structure
Finally, taking a look at expectations going out six months the VXST – VIX – VXV – VXMT curve tells a bit of a longer term bearish story. VXST is at a premium to VIX, but VXV and VXMT (3 month and 6 month volatility measures) both moved up.
What I read from the three term structure charts above is that the market expects another rebound, but is uncertain about the longer-term let’s say six months or so outlook for the direction of stocks. That is in no way a prediction, just how I read the volatility environment as of the close today.
With so much activity going on I decided to visit the VIX pit just after the 3:15 close and ask if there was a balance of bearish and bullish VIX trades or was the sentiment all in one direction. The response was it seemed to be bullish on VIX early, bearish mid-day, and then bullish again to finish the day. The chart below shows the price action from today, and it is interesting that the one minute VIX price action sort of matches up to the more subjective response I received from guys in the VIX pit.
Bullish VIX Trade (bearish on stocks)
Someone is looking for a protracted move higher in volatility and expressed this by purchasing 90,000 VIX Nov 21 – 30 Call Spreads for between 0.75 and 0.80 today. The payoff diagram below shows the payoff at November expiration. However, a trade of this size (over $7,000,000) is most likely part of a hedging program for a much larger portfolio and would be scaled out of or traded around before November expiration.
Bearish VIX Trade (bullish on stocks)
There was a buyer about mid-day of VIX August 12.50 Puts that paid 0.30. Needless to say this trade was a little early as VIX had another leg up in the last couple of hours today.
So that is the day that was volatility trading. As I finish this blog I look down and it is exactly 7:30 pm Chicago time. In 12 hours we will have a fresh employment report from the Labor Department. I for one think tomorrow could be pretty pivotal. It has been a long time since we saw a dip in the stock market that was not followed by a rebound. The market seems to be prepared for that rebound to occur very soon. An employment report that is taken negatively by stocks may just give us the first taste of the stock market not shaking off a bad day in a very long time.