Schaeffer's Trading Floor Blog

The (Underwhelming) 22% VIX Spike

Why the VIX is not yet at an 'extreme' high

by 4/13/2014 8:51 PM
Stocks quoted in this article:

Well, there's your market melt. And there's your volatility pop!

The SPDR S&P 500 ETF Trust (SPY) dropped 2.6% on the week, but it felt considerably worse, given that the biggest carnage was in the high-flying and more volatile names. Realized volatility spiked to 14, the highest level in three months.

The CBOE Volatility Index (VIX) popped 22% on the week, yet somehow managed to avoid closing 20% above its 10-day simple moving average. It is "only" 17.8% above … so a little overbought, yet not extreme just yet. And subjectively, it felt like an underwhelming volatility lift. I say that because that was pretty exceptional market ugliness all the way from early Thursday, almost in a straight line into Friday's close. Who wanted to hold ahead of a weekend? Or better yet, who wanted to hold without enormous protection?

On normal Fridays, you get a tad of weekend effect on options. Traders lower bids ahead of three days' worth of time decay, often giving an illusion of a volatility drop. On volatile Fridays, you tend to get the reverse. Traders/investors pay up in volatility terms for protection against a gap move on Monday. Fear of Meltdown trumps Fear of Paying Extra Decay.

That certainly felt like the prevailing dynamic Friday, and VIX did lift. It just felt primed for more of a volatility explosion, and we didn't quite get that.

Yes, we have a holiday-shortened week coming up, but again, fear of the market should trump fear of a slow week here.

VIX futures had similar behavior. They did well, but it was far from panic. Here's how the term structure went out.

VIX Futures Term Structure, April through November
Chart courtesy of VIX Central

The front end of the curve inverted, which helps iPath S&P 500 VIX Short-Term Futures ETN (VXX) on the margins, but the outer month slope didn't budge. The whole "complex" did lift over the week.

VIX Futures Historical Prices, April 4 and Now
Chart courtesy of VIX Central

Outside of the near months, it is tough to make the case that all that much happened.

It's kind of tough to form much market opinion based on options sentiment here. They're moving in reaction to the market, but really not doing much to add "value" beyond what you're seeing. You wouldn't need VIX to tell you that was an ugly week there. It's showing enough fear to say options are taking this move seriously, but not so much fear that it feels like an extreme of any sort.

The CBOE sure did time that CBOE Short-Term Volatility Index (VXST) options launch well! I wrote a book (self-promotion alert!) back in 2008, but I had the exact reverse timing experience. VIX was like 50 when I signed the contract, but something like 20 when it got published in 2009. So kudos to the CBOE!

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


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