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Published on Mar 27, 2018 at 1:24 PM
Updated on Mar 19, 2021 at 7:15 AM
  • Indexes and ETFs
  • Quantitative Analysis
  • VIX and Volatility
  • Editor's Pick

The Cboe Volatility Index (VIX) -- also known as Wall Street's "fear gauge" -- has been much more active than usual to start 2018. The index last week jumped more than 50% for the third week this year -- already the most surges of that magnitude in one year ever for the VIX. As such, the index has racked up its biggest year-to-date gain ever for this point in the year, according to Schaeffer's Quantitative Analyst Chris Prybal -- which could have bullish implications for the S&P 500 Index (SPX), if history repeats.

1Q Surge is a Change of Pace for VIX

Below is a chart of VIX year-to-date performances through March 23. As you can see, the VIX's 2018 gain of more than 125% through Friday's close is the biggest on record. However, as Prybal noted, it's much easier for the VIX to skyrocket when it starts the year in the low double digits, as it did this year.

vix 2018 ytd vs other years

This early rally in the fear barometer -- not to mention its volatility ETN relatives -- defies the typical seasonal trend. As of Friday, the VIX was up more than 20% in March -- the third straight month of gains of at least that much. That's dramatically higher than the index's average monthly returns, with the VIX typically in the red both in January and March. Further, VIX pops tend to occur in the late summer months, when stock traders "sell in May and go away."

VIX average monthly returns vs 2018

'Fear Gauge' Tends to Cool Off After Big Weeks

As alluded to earlier, the VIX last week surged 57.4% -- its third weekly gain of more than 50% in 2018, already marking a record. The index surged sharply in early February, due to a tech-led stock market correction. Only two other years -- 2010 and 2015 -- saw more than one weekly VIX gain of 50% or more.

VIX returns after 50% weekly gains

Following these huge weekly rallies, however, the VIX tends to cool off dramatically. The index was down 6.4%, on average, one week later, and higher just 25% of the time. One month out, the VIX was down 15.2%, on average, compared to an average anytime one-month gain of 2.1%, looking at data since 1990. Three months later, the "fear gauge" was down 32.5%, on average, and lower every single time. That's compared to an average anytime three-month gain of 4%, with a 45% positive rate.

That trend continues at the six-month and one-year markers. The VIX was lower by 16% and 28.4%, on average, respectively, after steep weekly gains, and higher no more than 22% of the time. That's compared to an anytime win rate of 46% for both periods, with average gains of 4.9% and 4.5%, respectively.

VIX after big weeks vs anytime

Stocks Tend to Rally After VIX Pops

So, what does that mean for the stock market? Well, it could be a bullish signal, if past is prologue. 

One week after VIX weekly surges of 50% or more, the S&P 500 was up 0.9%, on average, and higher two-thirds of the time. That's compared to an average anytime one-week gain of just 0.2%, with a 56% win rate. Three months later, the SPX was up 4%, on average -- nearly double its average anytime gain of 2.2%, since 1990. Further, the stock market index was in the black 80% of the time. One year out, the SPX was up a bigger-than-usual 11%, and sported a healthier-than-usual win rate of 89%.

SPX after big VIX weeks

In conclusion, the S&P has already bounced back in a big way after last week's VIX pop, enjoying its best day in years on Monday. If history is any indicator, the index could continue to outperform over the next year. In the meantime, traders should continue to monitor the SPX's dance around two very important moving averages, per Schaeffer's Senior V.P. of Research Todd Salamone.

Published on Apr 10, 2018 at 1:47 PM
Updated on Mar 19, 2021 at 7:15 AM
  • Quantitative Analysis
  • VIX and Volatility
  • Indexes and ETFs
  • Editor's Pick

After a slow burn to record highs in 2017, the U.S. stock market has been on a roller coaster this year, with volatility ramping up in a big way. As such, the Cboe Volatility Index (VIX) -- also known as Wall Street's "fear gauge" -- kicked off 2018 with a bang, logging its best start to a year ever. Against this backdrop, near-term put open interest on a handful of major equity exchange-traded funds (ETFs) has surged, sending up a stock signal not seen since before the November 2016 presidential election.

Near-the-Money April Puts Prevalent

Specifically, the combined front-month gamma-weighted Schaeffer's put/call open interest ratio (FM-GW SOIR) on the SPDR S&P 500 ETF Trust (SPY), PowerShares QQQ Trust (QQQ), and iShares Russell 2000 ETF (IWM) surged above 6.0 last week -- the most elevated reading since 2011, according to Schaeffer's Quantitative Analyst Chris Prybal. In a nutshell, this indicates that near-the-money put open interest on SPY, QQQ, and IWM handily outweighs call open interest in the April series of options, which expires at next Friday's close.

FM-GM SOIR since 2008

Previous Option Signals Have Been Bullish

The combined FM-GW SOIR 10-day moving average officially topped 5.0 on March 23, marking its first trip above this threshold since Nov. 3, 2016. Below is how the S&P 500 Index (SPX) has performed after previous such highs in this metric, looking back to 2008. Notice that there were no signals in 2013, 2014, or 2017.

SPX after FM-GW SOIR tops 5

One week after a signal, the SPX has gone on to average a return of 2.1% -- about 10 times its average anytime one-week return of 0.2%, looking at data since 2008. Two weeks out, the S&P was up 3.3% -- again, roughly 10 times the norm -- with a positive rate of 88%. It's a similar story looking all the way out to a year after a signal, with the SPX averaging a gain of 20.3% -- more than twice its average anytime return of 9.8%. Plus, the index was higher 100% of the time both six and 12 months after these options signals.

'Fear Index' Tends to Drop After Signals

As you might expect, the VIX has plummeted after the combined SPY/QQQ/IWM FM-GW SOIR average tops 5.0. The "fear index" suffered an average loss at every checkpoint up to a year later, compared to average anytime gains. Only at the one-year marker has the VIX averaged an anytime loss of 1.8% -- though its post-signal loss of 50.2%, on average, far overshadows that. In fact, the VIX was higher 0% of the time six and 12 months out, compared to 40% and 42% win rates, respectively, anytime since 2008.

VIX returns after FM-GW SOIR tops 5

In conclusion, there's an abundance of near-the-money put open interest on the SPY, QQQ, and IWM -- more than we've seen in over a year. As Schaeffer's Senior V.P. of Research Todd Salamone noted on Monday, heavy SPY put open interest could translate into an options-related floor for stocks in the near term. What's more, after previous instances when the combined front-month gamma-weighted SOIR of the aforementioned ETFs went north of 5.0, the stock market tended to rocket higher, while the VIX plummeted.

Published on Apr 18, 2018 at 12:57 PM
Updated on Mar 19, 2021 at 7:15 AM
  • Indexes and ETFs
  • VIX and Volatility
  • Editor's Pick

The Cboe Volatility Index (VIX) -- also know as Wall Street's "fear index" -- yesterday ended lower for a sixth straight day, and closed beneath its lower Bollinger Band (BB) for the first time since August 2016, or 425 trading days ago. That marks the longest streak above its lower BB ever, going back to 1990 (as far as we have VIX data), according to Schaeffer's Senior Quantitative Analyst Rocky White. Here's what that could mean for the VIX and the S&P 500 Index (SPX) in the near term.

First, there are a lot of signals different traders utilize with the Bollinger Band indicator, but there are three especially popular ones: when an index or equity's price goes above the upper BB, a trader will often view it as being "overbought"; when the price goes below the lower BB, as we saw yesterday with the VIX, a trader will often view that as being "oversold"; when the bands contract and become very narrow, some traders use that as a signal that volatility may soon increase.

Stocks Slumped After Last 2 Signals

As alluded to above, you'd have to go back to August 2016 for the last VIX break of its lower BB. Prior to that, the "fear gauge" breached its lower BB in June 2015. Both of these technical signals preceded weakness for the stock market over the subsequent three months. Specifically, the S&P fell 4.32% after the 2016 break, and dropped 8.54% after the 2015 break. Below is how the SPX performed after the VIX broke its lower BB for the first time in six months.

SPX after VIX breaks lower BB

On average, the S&P 500 has modestly outperformed one and two weeks after these signals, gaining 0.36% and 0.46%, respectively. That's compared to average anytime one- and two-week gain of 0.17% and 0.33%, respectively, looking at data since 1993 (when the first signal occurred). However, one month later, the SPX was up a weaker-than-usual 0.56%, and three months out, the index was up just 1.07% -- about half its average anytime three-month gain.

spx after VIX signals vs anytime

VIX Nearly Doubled After August 2016 Signal

Meanwhile, the last two signals have preceded dramatic rallies in the VIX itself. After the August 2016 break, the volatility index skyrocketed 93.85% in the subsequent three months. Following the June 2015 signal, the VIX surged 85.3%.

VIX after first BB breaks in 6 mos

If past is prologue, the VIX could surge in the near term. A week after previous signals, the fear index was up 3.77%, on average -- more than three times its average anytime one-week gain of 0.86%, looking at data since 1993. Two weeks out, the VIX was up a massive 10.06%, on average, compared to just 1.37% anytime. Three months later, the volatility gauge was up 18.12%, on average, and higher 69.2% of the time. That's compared to an average anytime three-month gain of just 4.62%, with a positive rate of 45.6%.

VIX after signals vs anytime

VIX Discount Also Notable

Meanwhile, it's also worth noting that on Monday, the VIX discount -- which measures the difference between when spot VIX retreats south of the 20-day SPX historical volatility, indicating lower short-term volatility expectations are being priced in -- fell to negative 30%. Further, we had a VIX discount for 10 straight sessions -- something we haven't seen since late February, and prior to that since July 2016.

On average, and counting just one signal every 21 days, the S&P 500 dropped 2.73% two months after these signals, according to Schaeffer's Quantitative Analyst Chris Prybal. On the flip side, the VIX gained an average of 11.12%.

'Wrong Way' Speculators Could Limit VIX Upside

Nevertheless, Schaeffer's Senior V.P. of Research Todd Salamone said he still finds it "encouraging for stock market bulls that the historically 'wrong way' large speculators in the weekly Commitments of Traders (CoT) report have a record net long position on VIX futures. Given this group's poor track record, VIX upside should be limited as long as they have an extreme net long position. I expect the area just above 25, half this year's intraday high, to continue to act as resistance."

Published on Jun 27, 2018 at 3:10 PM
Updated on Mar 19, 2021 at 7:15 AM
  • VIX and Volatility
  • Intraday Option Activity

Volatility has ramped up in the U.S. stock market recently, as concerns over a possible trade war with the U.S. and China resurfaced. The Cboe Volatility Index (VIX) -- commonly referred to as the market's "fear gauge" -- has surged nearly 59% since its early June lows, last seen at 17.87, and is pacing for its biggest monthly gain since February.

Amid this spike, the 20-day buy-to-open (BTO) call/put ratio jumped to 4.98 back on June 13 -- its highest mark since Jan. 12 -- due to a 50:1 single-day call/put volume ratio that day, according to Schaeffer's Quantitative Analyst Chris Prybal. More recently, the BTO ratio was seen at 2.48.

Drilling down on that June 13 VIX options activity indicates a pair of volatility traders are expecting VIX to stage another late-summer breakout. Specifically, the two top VIX trades two weeks ago were 50,000-contract blocks of August 28 and 47.50 calls, though they appear to be unrelated.

Data from the Chicago Board Options Exchange confirms buy-to-open activity. The lower-strike calls went off at 18 cents apiece, while the higher-strike calls changed hands at 49 cents each, making the respective initial cash outlays $900,000 and $2.45 million (number of contracts * premium paid * 100 shares per contract).

While these options trades could be at the hands of speculators becoming more bullish in their volatility bets, spot VIX hasn't printed north of either strike since the stock market correction in the early half of February. As such, it's possible this is a result of traders hedging against another August volatility spike, with Schaeffer's Senior V.P. of Research Todd Salamone noted about this time last year that "VIX typically hits its year-to-date lows around the middle of July, before bursting higher into the months of August into October."

Supporting this hedging theory is the recent data from the Commitments of Traders (CoT) report, which showed large speculators on VIX futures swung from a net long to a net short position in mid-May. Speculators have held this net short position for six weeks straight.

Published on Jul 19, 2018 at 2:39 PM
Updated on Mar 19, 2021 at 7:15 AM
  • VIX and Volatility
  • Unusual Trading Activity

After spiking above 50 back in February -- its highest mark since August 2015 -- the Cboe Volatility Index (VIX) has retreated back to the 13 mark, below its average daily reading of 13.58 over the past year. Options traders have responded to this apparent lack of fear in the stock market with complacency.

Following yesterday's expiration of July-dated VIX options, VIX call open interest clocks in at 3.98 million -- a new 52-week low. Likewise, the 1.28 million options in put open interest on the volatility index also arrive at the bottom of their 12-month range.

Nevertheless, the bulk of those who have targeted VIX options appear to be bracing for (or hedging against) a short-term volatility spike. The August 30, 20, and 28 calls make up the top three open interest positions, where more than 534,000 contracts collectively reside, and data from the Chicago Board Options Exchange (CBOE) confirms mostly buy-to-open activity.

This particular attention to calls could signal outsized upside for the market's "fear gauge" in the near term, according to data from Schaeffer's Quantitative Analyst Chris Prybal. Since 2010, VIX call volume has accounted for 70% of options volume on the index, over an average 20-day period. There have been 1,200 instances in the past eight years where 20-day VIX buy-to-open call volume has exceeded 70% of total volume, like it does now -- which we'll call a "signal."

Following these previous call-skew signals, VIX returns exceeded the comparable at-any-time returns across all time frames going out one year. The most outsized gains come at the two- and six-month marks, where the post-signal returns nearly tripled the anytime returns.

vix returns since 2010

vix options since 2010

And while a recent stock market study done by Schaeffer's Senior Quantitative Analyst Rocky White found that the index could be headed toward a new low by month's end, this would just echo a VIX seasonal trend. In fact, as Schaeffer's Senior V.P. of Research Todd Salamone noted in an article around this time last year, the volatility index has historically hit year-to-date lows in July, before bursting higher into August through October.

Published on Jul 19, 2018 at 4:32 PM
Updated on Mar 19, 2021 at 7:15 AM
  • VIX and Volatility
  • Strategies and Concepts

Buying options is a whole different ballgame compared to buying stocks, in part because of the time value component of an option's price. Whereas a vanilla stock trader simply needs to be right on the direction of the stock's price, an options buyer needs that expected stock move to play out within a fixed period of time -- and that move needs to be substantial enough to offset the negative impact of time decay on the option's value.

Implied volatility (IV) is a key component of time value, and it reflects the market's expectations for how much volatility the stock will realize over the life span of the option. Internally, we use a metric called the Schaeffer's Volatility Scorecard (SVS) to help us identify stocks that regularly make bigger price moves than their options IV levels would suggest. 

SVS works by measuring a stock's realized volatility against the volatility expectations priced into that stock's at-the-money options over the past year. As such, it helps identify which stocks historically have been the best -- and worst -- for premium buyers.

The metric is calculated by creating a hypothetical at-the-money straddle trade with a constant 21 days until expiration each trading day of the year -- generating about 250 data points annually -- with IVs derived from actual at-the-money options. The hypothetical straddle is assumed to be held until expiration, when it's closed out for intrinsic value.

These 250 hypothetical straddle returns per stock for each year are used to calculate the SVS value, which considers three weighted criteria: 40% is based on the average straddle return; 40% is based on the percentage of positive returns; and 20% is based on the percentage rank of the straddle IVs. These metrics are then combined into a score ranging from zero to 100. 

High SVS readings (up to 100) indicate that a stock has consistently delivered bigger returns than its options IV levels have predicted, meaning it may be a strong candidate for premium-buying strategies going forward, as well. Low SVS readings (all the way down to zero) point to stocks that have consistently realized lower volatility than their options have priced in -- pointing to possible premium-selling candidates.

It's important to remember, though, that the SVS is not necessarily predictive of future outcomes, given that it's a lagging indicator. Instead, we look at the SVS alongside coincident volatility indicators -- such as 30-day at-the-money IVs and the term structure as a whole -- and combine that analysis with our usual technical and sentiment-driven critiques to pinpoint the strongest possible stocks for option-buying opportunities.

To learn more about identifying options trades, check out this primer on implied volatility. To get ready for earnings season, be sure to read about this options strategy.

Published on Aug 9, 2018 at 2:41 PM
Updated on Mar 19, 2021 at 7:15 AM
  • VIX and Volatility
  • Editor's Pick

The Cboe Volatility Index (VIX - 10.72) -- considered the stock market's "fear gauge" -- has dropped roughly 16% already in August, and today is eyeing a sixth straight loss and its lowest close since January. However, recent VIX options activity suggests traders are speculating on (or hedging against) a surge for the index.

The VIX 20-day buy-to-open (BTO) call/put ratio has been rising in recent weeks, and recently clocked in at 5.55 -- the highest since mid-July 2017 (during a similar Nasdaq winning streak, in fact). Echoing that, the 30-day implied volatility skew on VIX options is now at an annual low, suggesting near-term puts have rarely been cheaper than calls in the past year.

VIX 20day bto cp ratio august 9

In the past two weeks, the deep out-of-the-money VIX December 47.50 call has seen the biggest surge in open interest, with more than 113,000 contracts added. With the VIX currently just below 11, the fear index would need to more than quadruple by the end of the year for these calls to move into the money. Meanwhile, the September 20 and 21 calls, as well as the October 25 call, each saw more than 55,000 contracts added in the past two weeks.

Perhaps some of the recent out-of-the-money VIX call buying is attributable to shorts seeking an options hedge. As of July 31, Commitments of Traders (CoT) data showed large speculators -- a group that has been notoriously wrong on VIX -- were net short VIX futures by the most since mid-December. Plus, the VIX has been known to burst higher in the August-October period.

Whatever the motive, the Cboe Volatility Index has historically popped a week after its 20-day BTO call/put ratio exceeds 5.5. According to data from Schaeffer's Quantitative Analyst Chris Prybal, the VIX has averaged a one-week gain of 9.2%, and was higher 100% of the time after signals since 2010, of which there have been six. That's compared to an average anytime one-week gain of just 1.2%, with a positive rate of 47%, looking at VIX data since 2010.

Likewise, the S&P 500 Index (SPX) tends to dip after the VIX 20-day BTO call/put ratio tops 5.5. One week later, the SPX was down 0.6%, on average, and higher just 33% of the time. That's compared to an average anytime one-week return of 0.2%, with a 60% win rate, looking at data since 2010.

By two months later, however, the VIX has typically reversed lower. The fear gauge was down 2.3%, on average, and higher just once after the last six signals. The S&P 500, meanwhile, was up 2.3%, on average, two months after a VIX options signal -- slightly better than its average anytime two-month gain of 1.9%.

VIX after high bto cp ratio aug 9

SPX after VIX options signal aug 9

Published on Oct 2, 2018 at 7:33 AM
Updated on Mar 19, 2021 at 7:15 AM
  • VIX and Volatility
  • Bernie's Content

The long-suffering iPath S&P 500 VIX Short-Term Futures ETN (VXX) continued on Friday to hang (admittedly by just a thread) above its Jan. 11 low of $25.84, despite the increasing pressure of its overhead 10-day moving average. Last week's relatively unremarkable VXX action capped off a calendar quarter in which the fund, which is designed to mirror the performance of short-term Cboe Volatility Index (VIX) futures, fell nearly 28%.

With the early February "volatility melt-up" that sent VIX to its highest levels since August 2015 so far in Wall Street's rearview as to be a distant memory, the large speculators whose activity is tracked in the weekly Commitments of Traders (CoT) reports have once again gotten quite comfortable in their net short position on VIX futures. This group, which we monitor closely for their remarkable ability to mistime major volatility moves, has spent the past four weeks lingering around their largest net short position of the year on VIX futures (after a "sobering up" period from February through early May during which these investors were in a somewhat rare net long position).

While the S&P 500 Index (SPX) rallied about 4% from the end of July into its Sept. 20 record closing high, VIX futures pretty much just marched in place. For what it's worth, this would also imply that the volatility selling trade has not been a lucrative one over this same period.

And this leads us to the question: "If it's approaching insanity to be selling volatility at current modest levels (when staring us in the face is a depiction of the disaster that most recently befell this trade in February 2018), how exactly can this trade possibly be described in circumstances under which a worthwhile positive return is not produced over a period of steady market rally to multiple new highs?"

The accompanying chart also depicts the palpable 2-point increase -- from the pre-February crisis period to the most recent months of the post-crisis period -- in the "floor" for the VIX futures (from 10 back then to 12 now). Perhaps this serves to lessen the chances for a rehashing of the February "accident," since volatility is now being sold at a level 2 points "less crazy" than it was in late 2017. But what does this increase in the futures' lower bound ultimately say about the prospective level of market volatility?

weekly vix futures chart

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, September 30.

Published on Oct 9, 2018 at 3:17 PM
Updated on Mar 19, 2021 at 7:15 AM
  • VIX and Volatility
  • Quantitative Analysis
  • Editor's Pick

The U.S. stock market has struggled recently, with the major market indexes testing key support levels. As such, Wall Street's "fear index" -- the Cboe Volatility Index (VIX) -- jumped nearly 28% from last Wednesday's close at 11.61 to Friday's settlement at 14.82. This is the fifth time this year the VIX has surged more than 25% over a two-day time span, according to Schaeffer's Quantitative Analyst Chris Prybal, and could signal short-term outperformance for the S&P 500 Index (SPX).

Widening the scope, this is the 40th time this signal has flashed going back to 2000, though this year has had more than any other. Following the 39 previous occurrences, the SPX averaged higher returns across all time frames going out to six months compared to the index's anytime returns. Plus, positive returns were more frequent post-signal versus anytime at the two-week, one-, two-, three-, and four-month markers.

spx returns after volatility signal

VIX, meanwhile, tends to underperform its anytime returns after a rallying more than 25% over a two-day period. Most notably, perhaps, are an average two-month loss of 8.5% and an average six-month drop of 14.8%, compared to respective anytime gains of 3.4% and 5.5%. Additionally, the percentage of positive returns is much lower post-signal versus anytime across all time frames going out to six months.

 vix returns after volatility signal

Published on Oct 16, 2018 at 10:05 AM
Updated on Mar 19, 2021 at 7:15 AM
  • VIX and Volatility
  • Bernie's Content

It was just two short weeks ago in this space that we found ourselves looking askance at the state of the short volatility trade. And in the aftermath of last week's rapid-fire sell-off in stocks -- which was accompanied by the de rigueur spike in the Cboe Volatility Index (VIX) -- it's worth "assessing the damage" by way of a check-in with the iPath S&P 500 VIX Short-Term Futures ETN (VXX).

VXX ended last week on a gain of 19.9%, which marked its biggest weekly advance since late March. The surge in this VIX futures tracker didn't go unnoticed by speculative traders; on Thursday, call volume on VXX arrived at a steep 343,532 contracts. That marks the exchange-traded note's (ETN's) biggest one-day call volume since Feb. 6 of this year, when over 399,000 calls crossed the tape.

Echoing the day's explosion in call trading, Thursday's share volume in VXX ramped up to 140.44 million. That was the highest single-day total since -- you guessed it -- Feb. 6, when 142.97 million shares were traded.

Per the accompanying VXX chart, the ETN settled Thursday's session at $36.87, just a hair's breadth above its descending 320-day moving average at $36.84. The photo finish above this trendline, which previously contained the late-March/early April VXX incursion, directly preceded Friday morning's sharply lower open for VXX.

Despite these various signs of a "climactic" volatility event last Thursday, VXX moved off those early Friday morning lows as the week wound to a close. And by shortly after the session's halfway point, the ETN had climbed high enough to re-test the resistance of its 320-day moving average. However, VXX's attempts to sustain a move onto positive ground ultimately proved futile, and it closed down by 7.7% on the day.

To provide some additional (and valuable) context to our list of "Feb 6. vs. Oct. 11" comparisons, the Feb. 6 VXX high rang in at $54.97, whereas last Thursday's intraday peak was about 30% south of that high-water mark, at $38.69. That's analogous with the lower "panic highs" in VIX itself; the fear index achieved its year-to-date high of 50.30 on Feb. 6, and put in an eight-month high of 28.84 on Thursday last week.

With volatility jolting back to life after a lengthy slumber, it may yet be premature to say that the extremes in VXX share and option volume last Thursday may have marked the height of the current hysteria. In the meantime, the 320-day moving average should prove to be a trendline worth watching, as a break by VXX above and away from this descending ceiling would be truly remarkable.

vxx 320-day moving average 1012

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, October 14.

Published on Oct 29, 2018 at 9:14 AM
Updated on Mar 19, 2021 at 7:15 AM
  • VIX and Volatility
  • Bernie's Content

The following is a reprint of the market commentary from the November 2018 edition of The Option Advisor, published on October 26. For more information, or to subscribe to The Option Advisor -- featuring 10 new option trades each month -- visit our online store.

The ProShares Ultra VIX Short-Term Futures ETF (UVXY) was one of many volatility derivatives to get an overhaul after the Cboe Volatility Index (VIX) "explosion" that rattled markets in the early innings of 2018. Now, rather than tracking double the daily return of short-term VIX futures (a weighted mix of first- and second-month futures with an average maturity of one month until expiration), UVXY aims to return 1.5 times the projected volatility in stocks over the next month.

That adjustment to the UVXY methodology likely doesn't account for the apparent sea change in fund flows that serves as our point of focus this month, but it's useful context nonetheless for our analysis of this suddenly outperforming exchange-traded fund (ETF), which has received a shot in the arm this month as the stock market has spiraled into panic mode.

In fact, let's back up even farther. Since the start of 2015 to present, UVXY has registered net inflows of $3.74 billion, even as its net asset value (NAV) has cratered by some 84.1% over the past three years (per etf.com). Assets under management (AUM) currently stands at $302 million -- yes, with an "m" -- as those inflow dollars have been mostly eviscerated.

UVXY investors seemed generally undeterred from "business as usual" through the first nine of months of 2018, as net inflows totaled $207.39 million through the first three calendar quarters of the year. But simultaneous with the start of October, flows began to reverse out of UVXY -- just as the leveraged volatility tracker was beginning to shoot higher, and as the stock market was sinking.

These outflows began in earnest on Oct. 5, when $90.58 million was liquidated, and so far seem to have peaked on Oct. 11, when $104.46 million was yanked out of UVXY -- the same session the ETF peaked at $62.88, which was (at the time) a three-month high share price. As of this writing, some $333.61 million in outflows have been logged for UVXY on a month-to-date basis, bringing the current 2018 balance to $126.21 million in net outflows year-to-date.

The heavy liquidations in UVXY month-to-date have been accompanied by significant put accumulations, as well. In the past 10 trading days, the biggest open interest increases on UVXY have taken place at the now deep-out-of-the-money weekly 10/26 40-strike put (+5,504 contracts), the November 50 put (+4,992 contracts), and the December 50 put (+4,900 contracts). Data from the major options exchanges confirms a recent skew toward buy-to-open volume at all three strikes in recent weeks, suggesting speculative players are betting on UVXY to drop sharply from its recent heights. So have UVXY players -- after incinerating multi-billions of dollars in recent years chasing an ETF that whacked them for 90% (or more) of their stake -- now turned "savvy"? Or might they now be getting a case of cold feet just ahead of that very big UVXY rally that they'd previously chased in vain?

Per the accompanying daily chart of UVXY, traders who may have hoped to "sell high" on that Oct. 11 pop have already proven to be premature, as the fund went on to tag a new closing high of $63.98 as recently as Oct. 24, in the process settling above its 200-day moving average (in red). The close above this benchmark trendline marked what is so far the culmination of sorts of UVXY's relatively slow, patient march higher off its Oct. 3 year-to-date closing low, during which the shares took out resistance at a number of key moving averages, as shown.

The wild October ride in the stock market shows no signs of slowing just yet, and there's plenty of "uncertainty overhang" yet to play out -- in the form of midterm elections, Fed policy, China trade, and a couple more weeks of earnings -- before investors might have a chance for some respite. And if we can agree that the dogged inflows into UVXY in 2015 through 2017 were most certainly a "wrong-way" indicator with regards to the price action, then a fair hypothesis here seems to be that the massive UVXY outflows so far in October -- occurring against a backdrop of robust gains in the underlying -- should be viewed as a warning sign that there may yet be another leg or two left to the volatility ramp.

uvxy daily chart 1025

Published on Nov 5, 2018 at 2:07 PM
Updated on Mar 19, 2021 at 7:15 AM
  • VIX and Volatility
  • Indexes and ETFs
  • Editor's Pick

After suffering its worst month since the financial crisis in October, the Nasdaq Composite (IXIC) sent up a rare technical signal to start November. Specifically, the tech-rich index made seven straight triple-digit point moves -- the longest streak on record. The previous streak of triple-digit gains or losses was five days, set back in April 2000, according to Schaeffer's Quantitative Analyst Chris Prybal. Below is what we might expect after the Nasdaq's recent stretch of extreme volatility.

The recent streak started with a drop of more than 300 points on Oct. 24, which represented the index's worst daily point loss since April 2000. It was the index's worst daily percentage loss since August 2011. Over the next few sessions, the IXIC suffered two more triple-digit losses and four triple-digit gains.

There have been just seven streaks of at least four straight triple-digit point moves for the Nasdaq. The most recent was this past March, and prior to that you'd have to go back to the aforementioned rough patch in August 2011. The others all occurred as the dot-com bubble burst in 2000.

IXIC  triple-digit streaks

Because more than half of the signals happened during the tech crash of the early 2000s, long-term returns after these signals are extremely poor. On average, the Nasdaq was down a whopping 41.5% one year later, and positive just 17% of the time. It's a similar situation six months after streaks, with the IXIC down 8.5%, on average, and higher just 43% of the time. The only marker at which the Nasdaq was higher more than 50% of the time was three months after a signal, though the average return was still a loss of 1.6%.

Those stats are clearly way worse than the index's average anytime returns. Since 2000, the IXIC has been higher more often than not at every checkpoint, and averages a one-year gain of 7.6%, with a win rate of 76%.

IXIC after triple-digit streaks

IXIC anytime since 2000

In conclusion, at a glance, the signals above seem very bearish for the Nasdaq Composite. Again, though, one must consider that most of those signals occurred before or during a notorious stock market crash. Plus, as the Nasdaq has moved higher, triple-digit moves have become more common; a 200-point drop from 3,000 is much more significant than a 300-point drop from 7,000. What's encouraging is the index's ability to rebound after the last two stretches of multiple 100-plus-point moves.

In the short term, at least, several things could factor into stocks' trajectory. To start, tomorrow's midterm elections, which tend to precede big gains over the next six months. In addition, the Fed is expected to stand pat on interest rates at this week's meeting, which has also been bullish for stocks in the short term, since the current tightening cycle began in December 2015. But traders looking to speculate on the stock market without putting a ton of dollars on the line should consider buying options, with premiums likely to deflate as earnings season winds down.

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