Schaeffer's Trading Floor Blog

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Examining the price action for three of the Street's volatility vehicles

by 5/29/2014 7:20 AM
Stocks quoted in this article:

So, what else is happening across our volatility world in these days of Extremely Low CBOE Volatility Index (VIX)?

Well, the CBOE Russell 2000 Volatility Index (RVX) isn't exactly exploding, either. (Click on the charts below to enlarge.)

Daily Chart of RVX Since January 2014

But, guess what? When you compare it to the VIX, as we've done a few times recently, the chart looks like something out of the 1999 tech bubble.

Chart of RVX_VIX Ratio Since April 2007

OK, maybe it's not that extreme, but RVX does continue to act relatively well. Of course, it doesn't take complex math to see that it's all thanks to the sinking VIX.

The 10-day realized volatility in iShares Russell 2000 Index ETF (IWM) is about 18, so RVX is actually not expensive versus the underlying index action. But, like the SPDR S&P 500 ETF Trust (SPY), IWM had a big-range day that's about to drop off the 10-day number, so that "18" overstates the real volatility backdrop somewhat. Still, RVX could certainly go higher on the slightest burst of small-cap volatility.

You want some real volatility ugliness? How about our very good friend, the iPath S&P 500 VIX Short-Term Futures ETN (VXX).

Daily Chart of VXX Since January 2014

Remember that long streak of days between new all-time lows that ended in early May? It extended over three months to become the third-longest run of Non-Disaster ever.

Well, 3.5 weeks later, that's now a distant memory. VXX has now hit new all-time lows in 16 of the last 18 sessions. As Eli Mintz of VIXCentral tweets:

Volatilty mean reverts but contango losses are forever …

What's funny is the sudden burst of May ugliness here is actually mean reversion of VXX itself, offsetting the unusually strong February-through-April period. This particular stretch is more about VIX ugliness and growing acknowledgment that there's no particular need to pay up so much for VIX futures than the drip-drip-drip of contango on VXX.

The term structure has certainly flattened, but it still slopes upwards, chart courtesy of VIX Central.

Term Structure of VIX Since June 2013

So yes, VIX itself remains pathetic. But there's still hope for volatility pops if you look around for them.

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

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