Schaeffer's Trading Floor Blog

Volatility's 'Slow Train to Nowhere'

The VIX dropped on the week as the SPY inched lower

by 3/30/2014 9:05 PM
Stocks quoted in this article:

Another week, another crawl to nowhere.

We've just about completed the first quarter of 2014, and the numbers are staggering … if you consider "inaction" as staggering. The SPDR S&P 500 ETF Trust (SPY) huffed and puffed and lifted just about every pre-open and declined just about every day and closed the week down 0.71 point on the week, about 0.4%. But hey, at least they outperformed small-caps!

Honestly, the week felt worse than that, even factoring in Friday's modest rally. The CBOE Volatility Index (VIX) actually dropped on the week, despite the fluctuations and the overall decline. It ended last week at 15, and ended this past week at 14.41.

Even The Mighty Mighty iPath S&P 500 VIX Short-Term Futures ETN (VXX) dipped 0.73 point, or roughly 1.6%. "Flight Out of Quality," I Say!

On the year, SPY is up about 0.4%, VIX is up 5%, and VXX is up a little under 3%. So, it remains a slow train to nowhere with a modest uptick in fear that it won't hang in forever.

The VIX term structure, as always, prices in a future uptick in volatility.

VIX Term Structure since March 2013
Chart courtesy of VIX Central

In all fairness, though, those assumptions have receded over time. Still, an 18.38 VIX in November? Maybe one of these days they'll get it right, but it never seems to happen. And remember, a VIX rally between now and the right-hand side of the curve isn't good enough, it needs to actually be a more permanent lift for futures and options there to pay off.

Future VIX expectations have risen a smidge in 2014, alongside everything else volatility related. Here's the VIX term structure now versus how it looked on Jan. 2, with VIX itself at very similar levels.

VIX Futures Prices, Jan. 2 2014 and now
Chart courtesy of VIX Central

Now I'm not going to sit here and say that's extreme fear. But it is a low-octane lift in volatility expectations out in time in a market that's only proven that it can't either rally or decline.

Oh, and one other thing. I heard about some big bearish options bet this week, though I can't remember the actual bet, just that everyone got all excited (bearish, I mean) about it. The details don't really matter that much, it just highlighted a point I've meant to make forever. Big "bets" in index options are always on the downside, ALWAYS.

In 20+ years in the biz, I can't ever remember someone hearing about an index trade and saying "wow, that's really bullish." That's because the size order flow is essentially always of the hedging variety. Yes, I'm sure sometimes the initiator really does think the market will decline. But 1) He's not always right … in fact he's more likely a contra-tell than anything else and 2) No one ever knows his full picture anyway.

So don't overreact (or really react at all) when you hear about one of these sorts of trades.

Glad I got that off my chest … as you were.

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


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