We Finally Found a Use for VXX

VXX -- and the long holiday weekend -- add some much-needed context to Tuesday's VIX pop

by Adam Warner

Published on May 27, 2015 at 7:30 AM
Updated on Jun 24, 2020 at 10:16 AM

We saw a huge CBOE Volatility Index (VIX) surge yesterday morning. Our favorite fear-and-greed proxy jumped 15% out of the gate, which -- I will admit -- is pretty noteworthy no matter when it happens. It's especially interesting given that while the market was weak, it was far from an implosion. We dropped about 0.6% in the early trade.

The cause? Let’s call it "economic numbers that moderately beat expectations." Yes, the Fed might now tighten in four months instead of five months. Or "Greece"! Or ... I don’t really know; it really doesn’t matter. The point is, "Volatility is Exploding ... Time to Go To the Mattresses."

That is, until you put some context around it all. So please allow me to provide some context around it all.

VIX closed Thursday at a six-month low, and then was basically unchanged on Friday. In fact, this was almost exactly a six-month low. The last time we closed lower was on Nov. 26, the day before Thanksgiving. The fact that we last hit a local low on the session before a holiday, and now we did it again right before a holiday, is -- of course -- not a coincidence.

We mention this often, but it's worth noting again: On most occasions, VIX understates the "real" implied volatility ahead of long weekends, and then gives a much more accurate reading after the holiday. Options themselves have time value, and no one want to pay up for relatively worthless time (i.e., a long summer weekend).

Thus, it all leads to a misleading rally in VIX following the weekend, when it's viewed in percentage terms. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) is a terrible product to own, as we all know too well. But around holidays, it's a decent proxy for volatility, as it doesn't really have the same calendar quirks. And it "only" lifted about 2.5% in the early trade. In short time frames, VXX tends to move about half of VIX, so that suggests the "real" VIX pop was more like 5% ... and the rest was likely more about the weekend.

But alas, we need even more context. The VIX lift took it all the way back to 14. That’s still low historically, but that’s actually a bit higher than we’ve seen lately. In fact, it's been just about three weeks since the last close with higher than a 13 full, and we can't blame that all on worries about paying weekend decay at the end of the month. So while the one-day percentage pop overstates the VIX move, the actual level of VIX does suggest we have a bit more fear than we’ve seen lately.

I’m not sure what's going to keep a fear spike going as we head into summer -- it's not a time of year we tend to see much of anything interesting. But hey, you never know!

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

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