Schaeffer's Trading Floor Blog

Last Week in Volatility

Why volatility may have moved as stocks held steady

by 2/23/2014 4:31 PM
Stocks quoted in this article:

So I left the market for all of you to take care of last week, and I have to say, you all did a great job. When I last sat at the turrets on Feb. 14, the SPDR S&P 500 ETF Trust (SPY) closed at $184.02. By the close last Friday, SPY had moved all the way to … $183.89. That's a drop of a whopping 0.07%! I'm going to round that off to "nothing from nothing."

Of course, the range wasn't quite that small, though for four trading days, it was really pretty tight. The SPY hit a high of $184.95 on the week and a low of $182.60. That would represent a fairly volatile day (about a 20 VIX), but not so much when that's the range for an entire week.

If you told me that's how the market traded and asked me to guess how our friends in volatility world acted, I would have assumed they drifted lower.

As Felix Unger once said, "when you assume, you make an…" well, this is a family publication, so let's just say his advice was not to just assume. The CBOE Volatility Index (VIX) closed at 13.57 on Feb. 14 and then lifted to 14.68 on Friday. That's a bit of a divergence for an unchanged and relatively non-volatile week.

There are a few explanations why that can happen.

  1. There's news on the horizon -- maybe a Fed decision, a jobs report, or big earnings.

    That doesn't seem like the case here. We're a couple weeks from the jobs number, and there's no particular Fed development that we know of. Taper On! And earnings season is more or less in the rearview. If there's big market-moving news expected, it's not on the major radar yet.

  2. It's the calendar. Feb. 14 was the last session before a holiday weekend. Options traders tend to lower bids ahead of holidays, thus knocking VIX down a smidge. Perhaps it artificially lowered the VIX close.

    This one's possible, but if it was the sole reason, it wouldn't impact volatility indicators that are not calendar sensitive. Such as the iPath S&P 500 VIX Short-Term Futures ETN (VXX), for example. If VIX lifted but VXX flat-lined or declined, it's safe to say the volatility pop-let was a mere function of the calendar.

    VXX actually lifted though, up $1.06 (2.5%) on the week. That's equivalent to about a 5% lift in VIX. VIX actually lifted 8.2%, so it's reasonable to say that most of the VIX lift was "real".

  3. There's an as-yet unexplained reason why volatility ticked up a bit last week.

I'm going to go with this choice. I'm not saying anything major happened, but there was a minor increase in fear. And it was all on the short end of the curve. Here's the VIX futures term structure from Friday vs. a week ago Friday.

VIX Futures Historical Prices

As you can see, literally nothing happened behind the first two cycles. But those first two did lift a bit.

Personally, I find fear is a fade. This fear spike is so small, though, I'm not reading anything into it yet, just noting that it's there and we'll look again if this develops into something.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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