Those that casually watch VIX may not be aware of the variety of volatility indexes published by CBOE. On at least a weekly basis I take a look more than VIX and try to gain a little insight into the mind of the market. The curve below shows the relationship of four volatility indexes that represent consistent measures of implied volatility as indicated by S&P 500 (SPX) index option prices. What has been catching my eye since excess market volatility started to commence on August 21st is the relationship between VXV (3-month) and VXMT (6-month). Note the section of the curve highlighted by the purple box in the chart below and I’ll explain more below.
Since August 21st 3-month volatility has been at a premium to 6-month volatility on the close 25 of 30 trading days. Going back to early 2008 the shorter dated focused VXV has closed at a premium to VXMT about 13% of trading days with about 2 out of 3 of those closing levels occurring during what we refer to as the Great Financial Crisis in 2008 – 2009.
My interpretation of VXV being at a premium to VXMT was that the market was braced for Fed action at one of the two meetings left in 2015 (most likely December). VXV measured the nearest time frame just after the last meeting of 2015 and the one many pundits seem to be focused upon. With the market rally in reaction to the employment number this past Friday VXV dropped below VXMT. I heard calls that a hike may not occur until 2016 on Friday, but I’m not one for opinions, I like to see what the numbers tell me. Implied volatility is forward looking measure which can be used to gain insight into Mr. Market's mind. If VXV remains under VXMT consistently over the next few trading days I’ll see that as the numbers agreeing with the pundits looking to 2016 for the first rate hike in my children's lifetimes.
The S&P 500 rallied over 1% last week with all the gains coming from Friday. VIX dropped, but remained above the 20.00 level to extend the consistent number of closing days over 20.00 to 30 in a row with the streak going back to August 21st. The S&P 500 rally put pressure on the long funds with the leveraged long guys really taking it on the chin, againg with the price drop mostly being attributed to Friday.
Over the last hour of the day on Thursday this past week there was a pretty aggressive buyer of UVXY Oct 2nd 56 Puts. They purchased about 1500 contracts over the course of an hour. The best I can guess is the average price came to about 2.40. Over the last hour UVXY prices averaged 56.30 although the range for UVXY over this period was wider than a point. The payoff at expiration, which was Friday this past week, appears below.
I often refer to the monthly employment report as being like an earnings announcement for the equity market. When I make this sort of statement I’m usually referring to the price action of SPX and VIX options. I guess I need to broaden my focus and include the VIX related ETPs and their associated option markets as potential ways to play employment. The result for this trade was pretty positive for the put buyer as UVXY was down dramatically on Friday which placed the UVXY 56 Puts exactly 7 points in the money.