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A Laundry List of Extremes in the Volatility Complex

VIX is low, XIV is high, and SPY put options are pricing in extremely low volatility expectations

Dec 27, 2016 at 12:13 PM
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The CBOE Volatility Index (VIX) dipped last week into territory it last explored in August 2015, with the Dec. 21 intraday low arriving at 10.93. And in fact, the VIX that day logged its lowest daily close, at 11.27, since July 2014.

Meanwhile, the VelocityShares Daily Inverse VIX Short-Term ETN (XIV), which moves inversely to VIX, settled the Dec. 21 session at $50.34 -- an all-time high close for the exchange-traded note. The next day, XIV hit a record intraday peak of $50.55 before finishing with a loss of 1.8%. At that intraday high, XIV was up roughly 96% on a year-to-date basis, having nearly doubled its 2015 closing price.

Also on Dec. 22, the perennially underperforming iPath S&P 500 VIX Short-Term Futures ETN (VXX) cratered to its latest all-time low of $23.74. As of Friday morning, call open interest on VXX stood at right around 1 million contracts -- a considerably light accumulation that ranked below 98% of other readings from the past year, per Trade-Alert.

As for the SPDR S&P 500 ETF Trust (SPY), at-the-money options on the S&P tracker were pricing in 30-day implied volatility (IV) of only 10% as of Friday morning, which registered in the exceedingly tame 9th annual percentile. And the differential between call and put IVs has become considerably narrow, with SPY's 30-day IV skew of 22.5% checking into just the 3rd percentile of its annual range.

And at Friday's close, the IV term structures for both SPY and VXX were lining up to show an expectation of little or no volatility through year-end -- and then a bit of a pick-up into January, but still at the extremely low end of the spectrum.

We'd suggest, on balance, that this preponderance of evidence points to an increased likelihood of a volatility surge during the weeks ahead, and so a short-term VIX breakout would not exactly leave us shocked. But based on the above laundry list of signs that complacency has reached extreme levels, there are quite a few others who might be.

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