Despite slow market / grinding up of SPX / holiday shorted expiring cycle, VIX futures stop going down since TH AM. What is going on? I am betting on short-term bottom in place. njrookie
1) ?....there can be slightly aggressive put-buying taking place. 2) A short-term peak may be setting-up instead. :eek: 3) It'll be better to wait until January to develop a strong opinion of market direction.
My understanding of $VIX is that it is based a model-free variance swap formula. Effectively it is a weighted average of option implied vol. Here is my thought process: 1. about a week ago, traders in the option market started to sell premium in anticipation of slow holiday season. For a few days while SPX was moving down IV kept on drifting downwards. While traders knew mkt activities will be slow (or no activities at all due to holiday breaks) the VIX is calculated based on physical days (minutes), not trading days or trading activities. 2. somehow in the last couple of days bids for both puts and VIX futures start to appear, and VOL curve is not drifting down when SPX went up. whole IV curve on front month options started drifting up in the last couple of days, or at least not drifting down when SPX moves up. Apparently at $VIX of 20, some players stop settling vol. It is a short-term trade. I am just curious who would want to long vol just before Christmas-New Year break and so-called January effect. Am I missing something? Never too old to learn. njrookie
Because there is a difference between buying constant 30 day vol, which is what the VIX represents and buying SPX vol which is set to an actual expiration. The VIX futures have not been moving much over the last few weeks. They never really dropped with the "spot" VIX calculation. They are currently at 25.65.
Futures has sold off a lot. Relative to listed vol I cannot say. Futures haven't sold off as much as spot VIX because more "normalcy" (steepening of the term structure) but they have sold off a lot too. 12/7 SPX ATM 30 day vol was 25.5 SPX ATM 60 day vol was 26.1 The VIX spot was 30.59 . The Dec futures were at 28.6 The Jan VIX Future was 30.6 as well SPX was 1261 Today SPX ATM 30 day vol is 18.7 SPX ATM 60 day vol is 21.1 the VIX spot is 21 Dec futures settled at 21.36 Jan VIX is now 25.65 SPX spot 1261. Vol in almost all measures is lower and the term structure has steepend. Why so much "normalcy" being priced in? I am not sure.
Accounting for the "seasonality" component, they have not moved much. Of course vol is going to drift in over Christmas and New Years not to mention we just rallied 60 handles in the ES. That VIX future contract also "rolls" from DEC to JAN in the weighting of the options that also skews the price. I have no idea what normalcy you are talking about. But even 25 1/2 on the Jan futures is pretty elevated from a historical perspective.
I guess normalcy means the vol future term structure is upward sloping now, just like a normal yield curve. Both Jan and Feb futures dropped liked a rock on the past week until Weds (down 6% on Weds while SPX was flat that day). Then on the last two days (TH and today), SPX went up while both two front month futures went up 2-3 percent. The latest upward move was very unusual since they are accompanied by strong upward move in SPX. Again my thought was that institutions did not want to buy protection last week and earlier in the week due to seasonal effects. However now IV is at a more reasonable level some equity long-only players jumped in with some put protection to participate in the perceived coming January effects. That does not mean I am long VOL or equity. I am all out and ready to close the book for the year. W and TH saw the biggest movement of my account equity. on Weds I had an up day that is 5 times bigger than my previous best day. On TH I gave back 40% of the Weds gain, which is my biggest down day. njrookie
Normalcy is the term structure steepening (vs being very flat or inverted in times of distress). 60 day ivol is lower 5 vols. 60 day ivol incorporated the holiday season on dec 7 and still does today. In the same time period we have not changed price, though we did sell off and rally 50 handles over the 2.5 week period. Vol's come in a fair amount. 25 in the front month vix is still high in a larger historical perspective, but it's come in a lot especially within the context of where things were 2 weeks ago. And the surface as a whole is pricing in less risk than it was 2.5 weeks ago.