Schaeffer's Trading Floor Blog

The Tale of the S&P 500, the VIX, and One Magnetic Level

Volatility traders, like most everyone else, are eyeing the 1,850 level on the S&P 500

by 2/28/2014 7:37 AM
Stocks quoted in this article:

This will sound odd, but the most interesting thing about the market lately is the incredible lack of ability to pick a direction for more than like an hour. If you're an S&P 500 Index (SPX) bull, you've had countless threats to vault over 1,850, and they all fizzled out until yesterday. On the surface, that was somewhat bearish in the short term, yet every time it looked like the SPX was about to fall out of bed, it rallied again. We've passed the all-time highs of Jan. 15 in all four sessions this week intraday, before finally closing through by a small amount. It's more or less disappointment all around, unless you're short weekly at-the-money straddles and are just sitting tight.

Yet, despite all this churn, volatility acts relatively well. The CBOE Volatility Index (VIX) is down about 0.6 point on the week, which on the surface doesn't sound too great. But considering it's got a 14 full and 10-day realized volatility in SPX is about 6.5, VIX with a 14 full is somewhat high. On average, VIX has about a 4-point premium to realized volatility, but that's very context-related. With realized volatility this low, it's normal to see that premium expand a bit as the market anticipates a mean reversion in realized volatility. Having said that, though, a 7.5-point premium is on the high end. If you told me the backdrop and asked me to guess VIX, I'd probably say that was fair at about 12.

VIX derivatives are acting even better. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) is actually up about 1% this week. That's despite the fact that the futures curve sits in its standard contango posture.

VIX Futures Term Structure since March
Chart courtesy of

VXX is staying strong mainly because the nearer-term futures are holding onto their premiums. Not only doesn't the market consider 14 VIX modestly high, it expects the index to rally a bit more in the near future.

So, what am I missing?

Well, volatility trades "high" when there's news expected. We have the payrolls report in a week, but I doubt it's that. We could have news and worries out there that we don't know about; that's forever possible.

I'm guessing that's not it either, though. I think it's simply anticipation of what happens off this 1,850 magnet. The market seems to be saying that if we ultimately fail (a fake breakout now that we've closed at new highs), we fail fairly hard, and if we bust through for real, we go off to the races again. I don't have a strong directional opinion either way, but I do believe the volatility anticipation is a fade. We tend to see our volatility pops off moments when we don't expect them, and fear of What's Next seems to have started to bubble to the surface already. In my humble opinion, options disappoint a bit on this next market move.

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

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