Is This the Calm Before the Storm? A Look at VIX and Options Trends

The S&P 500 Index (SPX) has been historically quiet, the CBOE Volatility Index (VIX) is just off annual lows, and options volume fell to a 14-month low in July

Aug 24, 2016 at 3:10 PM
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Wall Street has been almost eerily quiet lately, despite Fed and political uncertainty. The S&P 500 Index (SPX) is in the midst of its longest streak without a big move since 2014, having failed to make a 1% move in either direction since July 8. Meanwhile, the CBOE Volatility Index (VIX) -- also known as the market's "fear gauge" -- hit an annual low earlier this month, and triggered a signal not seen since the financial crisis, while U.S. listed options volume hit a 14-month low in July, after touching a 10-month high in June (courtesy of the "Brexit" vote), according to Tabb Group (subscription required). So, is this the calm before the storm? Or is there more smooth sailing ahead?

On one hand, Schaeffer's Senior Quantitative Analyst Rocky White recently noted that single-digit historical volatility readings of at least 15 straight days for the S&P tend to precede bouts of short-term stagnation. Stagnation begets stagnation, so to speak, with the data pointing to a couple more months of low volatility. Those looking to profit from an extended bout of quiet trading could consider short straddles.

On the other hand, with the August 2015 crash one year in the rearview, the VIX close yesterday marked a year-over-year (YoY) drop of 69.6%. That's the fourth-lowest YoY reading ever, with the three prior signals occurring in October and November 2009, when the volatility gauge was a year out from the 2008 gloom, according to Schaeffer's Quantitative Analyst Chris Prybal. But according to data from S&P Dow Jones Indices, the 35th week of the year -- this week -- has generated the biggest rise in volatility, on average.

As alluded to earlier, options volume has been quiet lately, and the aforementioned data from Tabb Group indicates August is on pace for even less activity than July. On the Chicago Board Options Exchange (CBOE) -- which accounted for about 17% of equity market share yesterday, per the Options Clearing Corporation (OCC) -- equity put volume totaled 416,434 contracts yesterday, marking the lowest since July 13, and second-lowest since June 23, just before the aforementioned "Brexit" backlash. The 21-day average put/call volume ratio fell to 0.61, marking the lowest reading since June 2015.

On the International Securities Exchange (ISE), the ISE Sentiment Index -- which divides opening long calls by opening long puts -- registered at a 52-week low of 31 yesterday. In other words, purchased puts were more than three times as popular as calls on the ISE, which made up about 12.4% of total equity volume.

Echoing this, as of yesterday's close, buy-to-open options volume on the SPDR S&P 500 ETF (SPY), PowerShares QQQ Trust (QQQ), and iShares Russell 2000 Index Fund (IWM) over the past 20 days -- a cumulative tally, not an average of the individual ratios -- was flirting with year-to-date lows. Call volume on the exchange-traded funds (ETFs) fell a steep 33% over the last 20 days, while put volume sank 23%.

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Further, the 30-day at-the-money (ATM) implied volatility (IV) readings for the QQQ and IWM hit annual lows last week, and the SPY's current 30-day ATM IV sits at 10.9% -- in the 11th percentile of its annual range -- again hinting at attractively priced short-term options. But does all this suggest it's time to buy straddles -- a "directionless" options bet on volatility -- on the SPY, for instance?

According to recent data from White, no -- not yet, anyway. The proverbial "sweet spot" for SPY straddles, going back to 2010, has been when IVs are slightly higher, actually. Instead, traders looking to hedge against a volatility pop should consider buying VIX calls, Schaeffer's Senior VP of Research Todd Salamone recently wrote.  

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