Are We On Pace for a Low-Volatility Grind Higher?

Checking in on the CBOE Volatility Index (VIX) and other volatility gauges

May 21, 2015 at 9:15 AM
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I spilled a lot of ink this week on the AccuShares Spot CBOE VIX Fund Up Shares (VXUP) and AccuShares Spot CBOE VIX Fund Down Shares (VXDN). Frankly, I was hoping to get better insight on them once I saw the "live" markets, but so far, no luck.

The early look shows only that the markets are kind of wide. I've seen $0.50 and even up to $0.75 bid to ask. Volume is kind of low, which would indicate that many are in the same "watch and wait" mode. I'm still hopeful they take off, but we'll have to wait on that. But hey, there's still our whole wild and pre-existing Volatility World out there to tell us something, right?

The CBOE Volatility Index (VIX) itself continues to hover in this 12-14 range, as it has for most of the last couple months. And it's still hard to argue there's anything noteworthy about that. Ten-day realized volatility has tamped down; it's now about 9. Given that 4-point implied over realized premium represents somewhat of an equilibrium, there's not much external pressure out there on options prices.

Well, maybe there's one source of external pressure: The long Memorial Day weekend is upon us, and it's not likely we get one of those Fear of Tuesday Gap moments in volatility. Rather, Fear of Paying 3 Days' Decay With No Enormous Prospect for Market-Moving News looks likely to win out, and we may see VIX temporarily dip further. But hey, don't tell VIX futures traders!

 
150521Warner1

Nothing ever changes here. We're always six months away from a lasting VIX rally.

The iPath S&P 500 VIX Short-Term Futures ETN (VXX) hit new all-time lows again this week, which is hardly newsworthy. And if VXX is doing poorly, the souped-up, leveraged VXX derivatives aren't doing too well either. The ProShares Trust Ultra VIX Short Term Futures ETF (UVXY) had a huge rally yesterday … if you neglected to factor in that it split 1:4. This marks the fifth reverse split in the short and inglorious history of UVXY. And hey, there's a trading strategy associated with the split.

Of course, we can actually expand our study.

I suppose that depends on your time frame … But yeah, UVXY remains horrible.

Perhaps the most interesting thing is that we're still tracking 2014 pretty well. If that holds up, we have a couple more months of a low-volatility grinding rally ahead of us, followed by a modest spike up in mid-July. I doubt we track exactly, but it's food for thought.

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

 

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