Published on May 14, 2015 at 9:04 AM
Updated on Jul 13, 2020 at 2:42 PM
  • VIX and Volatility

If there's one thing that defines 2015 so far, it's that at the end of the day/week/month, nothing much tends to happen. Like the prices on the board better last week? Not to worry, you'll probably see them again next week. And so on. Churn, churn, churn.


So, it sure seems like good times for option-shorting strategies. The Chicago Board Options Exchange (CBOE) indexes several, including the CBOE S&P 500 PutWrite Index (PUT):


"On Friday, May 8, the CBOE S&P 500 PutWrite Index (PUTSM) closed at 1501.08, its highest all-time daily close and the first time the index closed above 1500. PUT is an award-winning benchmark index that measures the performance of a hypothetical portfolio that sells S&P 500® Index (SPX) put options against collateralized cash reserves held in a money market account."


That, of course, makes some sense. Over time, a strategy that mimics PUT does quite well. But here's what's a bit odd: It hasn't done terrific in 2015, at least on a relative basis. Here's PUT vs. the SPDR S&P 500 ETF Trust (SPY) for this year:


Chart courtesy of TDAmeritrade thinkorswim

It's about 100 bps better than SPY, which is nice, but it's literally only accomplished that in the last couple days. It actually modestly trails another very similar CBOE index: CBOE S&P 500 BuyWrite Index (BXM). PUT indexes rolled put sales, whereas BXM indexes rolled buy-writes. They sound like they should track almost identically -- and they do -- but BXM has outperformed a bit all year.

Chart courtesy of TDAmeritrade thinkorswim

It's important to remember that these are indexes, not funds. So, why would the theoretical buy-write outperform an identical put sale? It really shouldn't; they should be essentially equal, if it's the same strike. And selling puts might tie up less capital. But what if I told you there was an even better way to take advantage of the range in 2015 than either of these?

Remember our friend the VelocityShares Daily Inverse VIX Short-Term ETN (XIV)? It's the inverse of the iPath S&P 500 VIX Short-Term Futures ETN (VXX). It's not identical to selling puts, but it should behave in a similar fashion. The contango drift in VXX mimics the time decay of a regular option. Here's XIV vs. PUT in 2015:

Chart courtesy of TDAmeritrade thinkorswim

Now THAT'S outperformance. Of course, you can't get that without risk. Volatility has declined across the board this year in a big way. That's mostly thanks to the pop at the end of 2014, and the pleasures of arbitrary endpoints. If we get a vol pop, XIV might wildly underperform SPY and PUT and BXM in shorter time frames. All of which highlights an oddity of the strategies highlighted by PUT and BXM: Options-writing strategies reduce the volatility of returns!


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


Published on Jun 29, 2015 at 2:56 PM
Updated on Jul 8, 2020 at 11:42 AM
  • VIX and Volatility

Anxiety from overseas has sent U.S. markets on a wild ride today, with the Dow tracking a more than 290-point path so far. This frantic price action is being witnessed in a number of volatility vehicles, including the ProShares Trust Ultra VIX Short Term Futures ETF (UVXY), the iPath S&P 500 VIX Short-Term Futures ETN (VXX), and the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) -- which are all making notable moves.

  • UVXY is up 28.8% at 42.69, after hurdling its 40-day moving average. This trendline has been ushering the shares lower since mid-February, providing a big hand in ProShares Trust Ultra VIX Short Term Futures ETF's 68% year-to-date deficit. In the options pits, calls and puts are crossing at two times the average intraday pace. It appears speculators betting on a quick retreat by this Thursday's close are buying to open the weekly 7/2 38-strike put, while those eyeing an extended run higher are purchasing new positions at the weekly 7/2 42-strike call.

  • VXX has jumped 14.4% to 19.85. The exchange-traded note (ETN) has taken out its 50-day moving average, and is also on pace to notch its highest close since mid-May. Longer term, iPath S&P 500 VIX Short-Term Futures ETN is off 38% year-to-date, and hit a record low of 16.85 last Wednesday. Speculators are rushing the equity this afternoon, with overall option activity running at almost three times what's typically seen at this point in the day. Drilling down, new positions are being initiated at VXX's weekly 7/2 20-strike call and August 17 put.

  • XIV -- which trades inverse to that of VXX -- is down 13.1% at 42.26, and on track to close south of its 60-day moving average for the first time since Feb. 23. Year-to-date, the ETN has added 36%, and topped out at an all-time peak of 50.10 (you guessed it) this past Wednesday. While the VelocityShares Daily Inverse VIX Short-Term ETN doesn't trade options, there's still plenty of skepticism surrounding it. Specifically, more than 70% of the ETN's float is sold short.
Published on Jun 8, 2015 at 10:36 AM
Updated on Jul 7, 2020 at 2:47 PM
  • VIX and Volatility

I know I harp on the overstatements of volatility in financial media, but I’m pretty sure it reached a crescendo on Thursday afternoon. So help me, I heard a guest on CNBC talk about increasing vol about every 10 seconds.

The Nasdaq chair even came on and noted the uptick in vol and predicted higher vol ahead -- and then proceeded to contradict his argument by pointing out that 100-pt moves (in the Dow Jones Industrial Average, I assume) aren’t as meaningful now that price levels are this high. I take that all to mean that yes, we’re really volatile, if you take the absolute gains and losses in the indices of today and relate them to the absolute levels of the indices 20 years ago. Which, of course, makes perfect sense.


That’s not to say there’s not actual actual volatility out there. Currencies are flying all around. The euro exploded mid-week, then the dollar bounced big on Friday. Euro bonds are going a bit nuts, and our bids have picked up vol steam as well. And it's certainly not beyond the realm of possibility that it all eventually sloshes over to our stocks.


It just hasn’t yet, despite what they keep telling us. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) had a somewhat ugly week amid a rather churning and frustrating year. But it did not have a day last week with a greater than 1% top-to-bottom range, though Thursday was almost exactly 1%. A volatility of 16 implies that two-thirds of days have ranges within 1%. So, we’re talking a peak of about 16 volatility on a week we can’t stop talking vol.


If 16 VIX is our new standard of big vol, then I suppose I’m entirely wrong, and volatility is back in a big way! But I suspect no one thinks that; 16 vol is modestly high vs. what we’ve seen these last few months, as it's far from a moon shot.


Again, the euro and euro bond vol could transfer to U.S. stock vol. There’s also about 1,000 reasons why vol can go higher. And, of course, it will go higher; it always does eventually. Which brings me to another pet peeve: “Uncertainty."


Uncertainty is always the blanket excuse for everything. It's why we can’t buy stocks (uncertainty about the timing of rate hikes), why Company X is underperforming, why the Mets never sign good free agents, et. al.


And it's an excuse that’s beyond ridiculous. There’s. Always. Uncertainty.


If there wasn’t uncertainty, options volatility would be about zero. Every stock would be perfectly priced, so why do we need options? In fact, I could make the case that the CBOE Volatility Index (VIX) is as good a gauge as any for the level of actual uncertainty. The higher the VIX, the more uncertainty going forward. If VIX is 13, people aren't all that uncertain about future interest rate hikes. Or better: They’re not all that worried about the timing of the hikes.


But I know I’m talking to a wall on this. Constant features about the imminent rise in volatility are here to stay. It doesn’t mean they’re right. I mean, one of them will be very well-timed, most others will not. It's just a standard part of the financial conversation that isn’t going anywhere. 


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

Published on Jun 15, 2015 at 9:02 AM
Updated on Jul 7, 2020 at 2:38 PM
  • VIX and Volatility

Stop me if you think you've heard this one before, but… Everybody wants to buy some CBOE Volatility Index (VIX) calls! There's this, from Bloomberg:

"While the turmoil that rocked bond and currency markets in past weeks has been mostly absent from equities, it won't be forever, options traders speculate. 

They're building hedges against equity swings to levels not seen in eight months, according to contracts tied to the benchmark gauge for U.S. stock volatility. Judging by the most popular options, many of them are bracing for disturbances in the next six days.

… [A]bout 3.8 options protecting against a jump in the Chicago Board Options Exchange Volatility Index are held for each contract predicting a decline, Bloomberg data show. 

… [F]ive of the 10 most-owned VIX contracts are calls with strike prices as high as 23 expiring June 17, the last day of the U.S. central bank's June meeting." 

There was a also a huge call spread roll this week that bumped some of that open interest out to July, so basically there's a "bet" on both a very near- and not-quite-as-near-term  on a sizable VIX pop. And as Bloomberg notes, we've seen this before. Last time the open interest got this lopsided was September 2014, and it preceded a rather ugly October in the markets. 

As readers know, there's always a "bid" for VIX calls. We’re just at the higher end of that relative bid. On the one hand, it makes some sense. There's all these scary stories out there like Fed Hikes and Greek Defaults and yet VIX itself has barely budged. On the other hand … everyone always sees danger ahead, and always specs on cheap VIX calls. 

And then there's that pesky argument about whether it's "sharp" money chasing VIX paper, or "square" money -- i.e. John Q. Public hoping for a lottery ticket. And frankly, who knows? I always think contrarian first, especially when I don't see an ostensible reason for the behavior. But now? Eh.

As we've noted recently, volatility has picked up a bid in other asset classes, such as euro bonds and the actual euro. So why wouldn't you take a cheap shot at it sloshing over to VIX? The amount of money actually invested in VIX calls is incredibly low vs. any sort of asset class out there. Remember: All the spec is in cheap dollar calls. So yes, sentiment-wise I think it's a fade every time a crowd has the same idea. But we're just not talking enough of an overall "bet" for this to really have huge impact in that way, in my humble opinion. 

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

Published on Jun 22, 2015 at 8:57 AM
Updated on Jul 7, 2020 at 2:24 PM
  • VIX and Volatility

Another Friday, another weekend with worries about Greece. But at least there's a big summit today and we can finally put this crisis behind us. From MarketWatch:

"European Council President Donald Tusk on Friday sought to play down expectations ahead of an emergency meeting of eurozone leaders, saying the Monday gathering won't be the 'final step' in negotiations over Greeece's [sic] bailout. 'The purpose of the summit is to make sure that we all understand each other's positions and the possible consequences of our decisions. The summit will not be the final step and there will be no detailed technical negotiations,' Tusk said in a letter inviting eurozone leaders to the meeting." 

OK, I guess not. That's good, though; I mean, what would we do every time we got new or near all-time highs? We need some reason to stop, and thanks to the never-ending Greek story, always have a reason to pause.

So here's to never resolving Greece! Forty more years! Forty more years!

If we're so worried about Greece over here, we have a funny way of showing it. The CBOE Volatility Index (VIX) remains mired in the low teens. It remains more "excuse to sell" than "reason to panic" so far.

But... there's a whole world of "fear gauges" beyond VIX. Including Europe's VIX. And that Europe VIX is doing quite well. ZeroHedge ran this chart the other day: 




Yes, Europe's favorite fear gauge is at its highest level related to our VIX. In fact, every fear gauge is doing well relative to VIX. We remain an island of calm amidst a sea of Greece worries.

The assumption remains that it's just a matter of time before we start to wake up and smell the fear that's percolating around many other asset classes. The trick is always in the timing. As we note weekly, we're overdue for a VIX blip. We're also sort-of due for a longer-lasting volatility lift. I just wouldn't assume any of that means doom for the actual market. We can lift alongside rising volatility. And I guess that's what I ultimately expect: a period of gradually rising volatility and a market that still acts well.

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

Published on May 13, 2015 at 9:01 AM
Updated on Jul 7, 2020 at 12:01 PM
  • VIX and Volatility

As long as we're looking for contra tells in VIX-land, here's an interesting one. This, via Bloomberg:

"After the storm, calm. That's what happened to U.S. equities in 2014 and, going by bets in volatility futures, that's what big speculators see occurring again. Short positions in futures tied to the Chicago Board Options Exchange Volatility Index have tripled since February and now outnumber long ones by the most in 11 months, Commodity Futures Trading Commission data released Friday show.

"...Hedge funds and other large speculators in VIX futures held about 138,000 long positions and 213,000 short ones through May 5, CFTC data show. The bets on a lower VIX have climbed steadily since February as the gauge of S&P 500 options costs has dropped 34 percent."

Now of course, it's hard to blame them. Here's the CBOE Volatility Index (VIX) futures on Tuesday after our weekly bout of market ugliness:


 Realized volatility tends to hover near 10. VIX itself has spent most of 2015 in the 13-16 range, yet you can sell VIX futures half a year out in the 18-19 range. Always. Same as it ever was.

The thought is that the Fed will keep delaying rate hikes, and that's not a crazy thought, of course. But to me, it's more just about the reality of volatile markets and the permanent bid-up for time. If you're willing to become the insurance company against that lasting VIX pop, that will surely happen someday; you always have the wind at your back. You're going to take a hit someday, but it's likely you will have done so well until then that you can afford an occasional accident.

From that standpoint, it makes perfect sense that large hedgies are playing that game in a big way. In and of itself, it's not a contra tell to see smart money making a sensible play.

The thing is, this opportunity has existed forever -- or at least forever in VIX-time. Ever since volatility declined from the 2008 spike, the markets have priced in a future VIX "mean" reversion. They could have slapped this trade on over and over again. So, the fact that they're playing it larger now does have some significance. I'm definitely a believer that "zigging" when the masses "zag" is a sensible strategy. So, by that thinking, I should buy vol into this.

On the flip side, though, these aren't "masses" -- these are hedgies. Fading them is more of a mixed bag. And again, it's a strategy on their part that makes some sense given the pricing structure. So, I'm going to file this away as an interesting data point, but not something I'm going to react much to.

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

Published on May 12, 2015 at 9:09 AM
Updated on Jul 7, 2020 at 10:53 AM
  • VIX and Volatility
Everybody and their guru predicts a CBOE Volatility Index (VIX) rally sometime relatively soon. The next guy that gets on TV predicting drifting or even flat volatility will be the first guy. So, maybe we need to find this Rick Rouse from InvestorPlace and get him on CNBC! Here’s what he has to say:

"My chart work is telling me that the S&P 500 could make a run at 2,200 to 2,300 over the next six to 12 months and, if it does, it is very likely that the VIX will be below $10. This will certainly have the talking heads clamoring and questioning what is wrong with the volatility index ... [T]he VIX has fallen below 10 on only a few occasions.

"If and when the VIX does test $10 to $9, I would then become cautious myself on a market pullback, correction or selloff. It is possible that the VIX could hold $10 for a few weeks, but it will have become a hot topic, if not the hottest story, by then, at which point it will be time to go."

I don't necessarily agree that VIX will get to single digits. There's a bit of a floor in implied vol where it doesn't become economically viable to short options. Yes, realized vol can and does get lower than that. We've seen fulls of "3" at times over the past year. But, it's tough to convince traders that those lows will persist going forward, and as such it's tough to convince anyone to sell options at implied vols below 10.

In order to maintain a 10 vol, you'd need the S&P 500 Index (SPX) to have ranges of about 0.6% on two-thirds of trading days. That's really not a high bar. I'm not saying we won't see realized vol that low (we often do), just that you also have to convince "the market" that realized vol that low will persist going forward. And that's not something that happens terribly often.

But hey, it's a refreshingly contrarian opinion. I do believe that there's a good chance we break this current range to the upside, if for no other reason than it's the less-expected outcome. We're told over and over again about high earnings multiples, future interest rate hikes, sluggish economic numbers, et al. Bullish sentiment tends to lag, even in rallies. So, we could definitely see a rise on a "Wall of Worry."

Yes, I know I just wrote we're a bit overdue for an overbought VIX. But, none of this is mutually exclusive. We can see a short-term VIX pop within a longer-term flat or drifting VIX. In fact, we often do. It happened as recently as last year. VIX went to near single digits in early July and then shot up to overbought two weeks later.

I guess the moral of the story is most every call will eventually prove correct. Long-term trend changes are tough to time. And so are short-term blips, for that matter. We know both will happen, we just never can know exactly when.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.
Published on Jun 11, 2015 at 9:08 AM
Updated on Jul 7, 2020 at 10:50 AM
  • VIX and Volatility
The CBOE Volatility Index (VIX) is called the “fear index” by just about everybody, so it’s easy to forget that it’s merely one way to gauge fear among countless others. Fortunately, CNN quantifies several into their own proprietary Fear & Greed Index.

We were at “Fear” before yesterday’s blast-off, but still a bit above “Extreme Fear.” I’d view this as a contrary indicator, but these sort of sentiment tells are tough market-timing tools. As we know too well, extreme fear can beget really extreme fear before it finally turns. We hit the 90s about this time last year, and in hindsight, that was a good sell signal -- although it took another month or so before that played out.

Our level of “fear” now seems pretty appropriate. The market rotated between churn and downright ugly in recent weeks, so a bit of apprehension seems warranted. So, the actual level of the overall index doesn’t tell us much. The breakdown of how CNN gets there is more interesting.

The index contains two options indicators. One is based on put/call volume; the other is based on VIX and its 50-day moving average. CNN rates both of these “neutral,” which I can see surprising people on both sides of the VIX debate. Half see us in some sort of volatility pop that doesn’t quite exist yet, whereas others see the absolute level of VIX as rather low. I guess, given that debate, neutral is about right. I’d throw in that VIX is pretty neutral vs. realized volatility, and VIX futures are neutral in that they’re in their permanent overbid in the out months.

So, where’s the fear showing up? CNN highlights three spots:  

"Stock Price Strength: The number of stocks hitting 52-week highs slightly exceeds the number hitting lows but is at the lower end of its range, indicating extreme fear...

"Stock Price Breadth: The McClellan Volume Summation Index measures advancing and declining volume on the NYSE. During the last month, approximately 11.35% more of each day’s volume has traded in declining issues than in advancing issues, pushing this indicator towards the lower end of its range for the last two years...

"Market Momentum: The S&P 500 is slightly above its 125-day average. During the last two years, the S&P 500 index has often been further above its 125-day average than it currently is, so declines like this indicate extreme fear."

I could make the case the latter is more of a support/resistance line than anything else. The market has clearly stalled, but as you can see on CNN's chart, it’s bounced off the 125-day MA a few times in this run. We’ll see if that happens again.

The first two are more worrisome, though. Declining breadth is never a good sign; it suggests that there is more pain out there than the rather tame basic indices would suggest. Ironically, sputtering Apple Inc. (NASDAQ:AAPL) could help that picture. It’s such a large component of the indices that breadth might start looking relatively better if there’s a flow of cash out of AAPL and into ... not Apple. All in all, it’s some sluggish numbers behind some sluggish market days.

Disclaimer: Mr. Warner’s opinions expressed above do not necessarily represent the views of Schaeffer’s Investment Research
Published on May 22, 2015 at 9:35 AM
Updated on Jun 24, 2020 at 1:31 PM
  • VIX and Volatility

It's Friday. It's Memorial Day weekend. It's … very likely to be really slow, as far as options go today.

Just a quick refresher before we get to the disjointed "random thoughts" section of our show. Options have time value. Not all time is created equal. Time that includes three days of no trading and a fourth day that contains very little trading and price action has way less value than four normal trading days. As such, traders tend to lower bids and offers into long weekends. This translates into lower implied volatility readings and declines in indexes like the CBOE Volatility Index (VIX) that proxy volatility.

Yada, yada, yada … we may see the 2015 VIX lows pierced again today, followed by a VIX "rally" on Tuesday, when the calendar itself catches up. It's not terribly meaningful; it won't really effect the tradable VIX complex.

Anyway, way back when, companies had to trade for a few months before their options listed. That's not at all true anymore; it takes like a week now, for most names. But not all names…

I'm not entirely sure which condition Shake Shack Inc (NYSE:SHAK) violates. I also don't care; let's waive it. It figures to be a very popular options series when it lists. Not to mention it's going to see some nice high volatility, and we could use that in a widely followed name.

While you're waiting for SHAK options to trade, I highly recommend eating an actual Shack Burger -- they're awesome. Not sure they're "5,000x earnings" awesome, but I know more about burger eating than proper burger chain valuations. And besides, it's not just burgers:

"Shake Shack is considering the launch of a Chick-fil-A killer, according to a company filing.

"The burger chain's subsidiary, SSE IP, filed an application to trademark the name 'chicken shack,' CNBC reports.

"That could mean the company is testing a chicken sandwich or a new chain with a chicken-based menu.

"Shake Shack hasn't revealed any details of its plans."

And after that? How about going after Sirius XM Holdings Inc. (NASDAQ:SIRI)? We can call it "Radio Shack." Then a foray into '80s pop music with "Love Shack." Followed by a white paper on NBA fouling titled "Hack a Shaq."

OK, sorry. Never mind.

I do have a white paper for you, though, h/t Alexander Aljechin. So don't tell me you have nothing to read at the beach this weekend!

"This working paper develops first a mean-reverting logarithmic model for the VIX. In the next step the relation between the VIX and VIX Futures is modeled. VIX Options are evaluated by Monte-Carlo Simulation of Option-Trading Strategies. The model is also applied to the VIX based ETN VXX and VXX Options and extended to the VSTOXX and VSTOXX Futures."

And finally, #ThanksDave. I'm talking the David Letterman from the Late Night NBC years -- he was just awesomely funny and off the wall. I'm not sure old clips would do it justice. It was just great.

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

Published on Jun 23, 2015 at 7:55 AM
Updated on Jun 24, 2020 at 12:22 PM
  • VIX and Volatility

Apple Inc. (NASDAQ:AAPL) is the world's largest company… by a lot. This, from The Online Investor:




Yet, there's a force even greater than Apple. From the AP, courtesy of Yahoo! Finance:

"Taylor Swift has Apple changing its tune. 

Hours after the pop superstar criticized the giant tech company in an open letter posted online, Apple announced Sunday that it will pay royalties to artists and record labels for music played during a free, three-month trial of its new streaming music service. 

'When I woke up this morning and I saw Taylor's note that she had written, it really solidified that we needed to make a change,' said Apple senior vice president Eddy Cue in an interview with The Associated Press."

All of this leaves me with one question: If you give in so fast to Taylor Swift, how are you going to stand up to Putin? 

Wait. Apple's not running for office -- never mind. 

OK, seriously, there's no way to proxy the implied volatility of Taylor Swift. But fortunately, we do have a way to easily check in on AAPL volatility. And for a company with a news announcement and/or a major product launch every other day, AAPL vol acts quite poorly. Here's the CBOE Apple VIX (VXAPL) vs. the actual CBOE Volatility Index (VIX) over the past year.




Remember that with AAPL's huge market size, a good portion of actual VIX does depend on the vol of AAPL. And right now that AAPL vol sits at 52-week lows. The AAPL vol is actually near its all-time lows -- at least, as measured by VXAPL. We were lower than this after the April 2014 earnings report, and that's about it. Looking at the VIX of AAPL before the CBOE started indexing shows that this low-20s vol is about the floor. 

That's not to say it's "cheap," though. Ten-day realized volatility (RV) in AAPL sits near the mid-11s, and that's actually up slightly over the past week. And that's more or less the floor in AAPL RV going back in time. So, technically traders are actually overpaying for AAPL options -- or, more accurately, expecting an uptick in RV going forward. That's a pretty standard options premium in an individual stock that's seeing vol scrape against the lows. You're not likely to take any sort of "vega" hit, though you might see a "theta" hit, as there's likely not much news coming out in the next couple of weeks, and we have July 4 right around the bend. 

So, if Taylor Swift really wants to party like it's 1989, she should maybe sell some AAPL options now and sit and count her royalties for a week and change, and then cover and perhaps go long vol ahead of the holiday and ahead of the presumed earnings vol bump. 

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.
Published on Jun 19, 2015 at 9:31 AM
Updated on Jun 24, 2020 at 12:17 PM
  • VIX and Volatility

On one hand, everybody and their local billionaire are taking cover for the next market crash. For today's piece of evidence, I bring you this, from Steven Sears: 

"Major investors are preparing for the stock market to collapse.

In the past 10 days, these investors have quietly amassed significant CBOE Volatility Index (ticker: VIX) call positions. The VIX, commonly referred to as the "fear gauge," spikes in times of volatility. Call options, therefore, increase in value when stock prices plummet. Think of the options as catastrophic insurance policies. These trades are captivating the options market.

With the VIX now just below 15, top positions over the past two weeks include July calls at 17, 22 and 23, and August 17 and 23 calls. In recent trading, an investor bought 100,000 calls in apparent anticipation VIX will spike above 26 before the end of July. A trade of that size is not a retail investor's move -- that's an institution or someone running a significant portfolio." 

On the other hand, thanks to yesterday's rally, we now have yet another week of churn in the S&P 500 Index (SPX). We're right where we were this time last week … and on May 26 … and on April 24 … not to mention Feb. 25. 

In that light, it makes sense that investors' most popular opinion is that they have no opinion. In fact, the number of self-identified "neutral" investors in the American Association of Individual Investors (AAII) sentiment survey just fell beneath 45% for the first time in 10 weeks. 

All of which leads to a burning question. If no one has an opinion, then who is out there buying all these CBOE Volatility Index (VIX) futures and VIX calls?

The answer is likely that we're considering two separate questions. Opinions are interesting, but at the end of the day, maybe they don't mean that much. The VIX Frenzy, however, shows how many are voting with their actual money. And they're "betting" that actual money on a market dip and a volatility rip. 

Now, it's important to note that in the larger scheme of things, the volatility market is very small. You can buy a lot of VIX calls for a relatively low amount of money. Tracking those bets does give us insight into the marketplace, and it's an apples-to-apples comparison in that we see what they're doing in VIX now vs. other points in time. But at the end of the day, it's not a gigantic dollar commitment. 

So where does that leave us? We can't fully trust sentiment numbers, because those don't necessarily reflect actual behavior, but we also can't fully trust numbers like this VIX data because they're just not large enough.

I guess we have to use some intuition. I'm with those that say the rally remains hated and distrusted, and expectations for future volatility outstrip any and every measure of actual volatility. I'm not real sure we keep rallying in spite of all that. I mean, we stop around here every time. But I do believe that in a day or three when we inevitably start obsessing over the next Greece news or potential Fed hike, it puts a natural floor in until we see bullishness tick up.

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

Published on Jun 16, 2015 at 7:30 AM
Updated on Jun 24, 2020 at 12:08 PM
  • VIX and Volatility

Looks like the long awaited "Grexit" is here. Wahoo! (Full disclosure: I hate those made-up combo words like "Grexit" and "Brangelina" and "A-Rod.") 

What does it all mean? Well, I don't really know. 

I'm fairly certain it's mostly factored into the marketplace, since this story has hung around longer than the actual Greek Empire. The fear is that it has set off a disastrous chain of events a la the Lehman Contagion in 2008. 

The best case is, I suppose, that it's a contained non-event, especially as it pertains to us. Who knows? Maybe it ultimately pushes money out of German stocks and into U.S. stocks. 

The reality is very likely in the middle somewhere. Everyone's looking for a catalyst to set us into a bear move. Now we have one: Greece! Whatever effect a Greek default has on us will not materialize for a while, but if we happen to go into an ugly stretch now, well, we'll forever tie the stall/end of the bull to Greece. 

Upon first glance, it doesn't look like we're in a Panic Cycle just yet. The CNN Money Fear & Greed Index has tipped into Extreme Fear. 

But hey, don't blame options! We're the best factor out there -- Market Volatility is only in "Fear!"

Yes, it's hardly a swarm just yet. The CBOE Volatility Index (VIX) is in the 15s, and thanks to our recent wave of modestly higher volatility, we're nowhere near going overbought vs. the moving averages. The 10-day simple moving average (SMA) of VIX is a shade over 14 right now. We'd need to see VIX close above 17 to get it 20% above its 10-day SMA. 

That could happen today or tomorrow of course; it doesn't take much to get the Fear juice really going. That would actually be best-case scenario, in my humble opinion, if you're rooting for a rally. We're a jittery market in search of an extreme. Worst-case scenario is if we stay ugly, but not ugly enough, with options vol nudging higher in an orderly fashion. We saw that happen last fall and it took a while for the sell-off to play itself out. 

It's been a while since we went "officially" overbought. Our last VIX close 20% above its 10-day SMA happened in early January, so it's five-plus months in something that tends to happen about every 3-4 months. I'm bullish, or at least rooting for the bullish, but I'd rather see us just get this inevitable Fear Spike over with already. 

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

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