Schaeffer's Trading Floor Blog

Signs of Complacency in the Volatility Complex

Investors are betting against VIX as it plumbs multi-year lows

by 8/22/2014 9:30 AM
Stocks quoted in this article:

The CBOE Volatility Index (VIX) keeps drifting lower. And for a change, investors seem to want to play along. Interest in the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) is increasing, as per Bloomberg.

The Chicago Board Options Exchange Volatility Index, known as the VIX, has decreased 31 percent this month and investors are wagering on further declines. In the five weeks through Aug. 15, they put almost $320 million into the VelocityShares Daily Inverse VIX Short Term ETN (XIV) -- the longest stretch of weekly investments since the note began trading in 2010 ...

... After losing 12 percent in July as the Standard & Poor's 500 Index slipped 1.5 percent, both have rebounded in August, and shares outstanding of XIV have surged 33 percent this month, data compiled by Bloomberg show.

In a vacuum, that's somewhat bearish. VIX is pretty near multi-year lows again, and investors increasingly want to bet against it.

But perhaps it's more a function of the whole complex seeing increased interest.

XIV is the inverse of the iPath S&P 500 VIX Short-Term Futures ETN (VXX), and VXX almost always declines over time. So it's tough to ever argue with buying XIV. It can do well even in a flat VIX backdrop, as VXX will drift anyway. And it's not like the world has lost interest in VXX. It set a daily volume record on Aug. 1, and has a good shot at setting monthly records, as well.

What's more, VIX futures volume is soaring, as well. VIX futures volume averaged 292,683 contracts per day this month through Aug. 15, as per Matt Moran of the CBOE, vs. 159,498 in 2013.

Now, of course, not all that volume is generated by customers wanting to own VIX-something. There are many VXX and VIX futures shorts out there, as well. And all indications are that bearish bets on VIX are increasing all over the complex.

And prices of VIX protection have drifted, as well. Here's the VIX term structure now vs. on Jan. 15, a date where VIX was 12-ish. Hindsight tells us that was a four-month low in VIX. Chart courtesy of VIX Central.

VIX Term Structure

Investors are apparently increasing their bets against VIX at a time when they're getting less in the way of compensation to make those bets. The term structure still does slope upward; it's just flatter than before.

If you adopt a contrarian take to all things VIX, there are definitely signs of increasing complacency out there.

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

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