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While the media sensationalized Dow 20,000, equity markets finished lower Wednesday: the S&500 index (SPX) closed lower -0.25% to 2,265.18, the Dow Jones Industrial (INDU) closed -0.16% to 19,941.96, and the Russell 2000 (RUT) closed -0.63% to 1,375.19. Volatility, as measured by the VIX , is at historic lows, considering the average for the index is around 20.00; however, there is nothing to indicate that volatility can’t remain below that level. It remains to be seen if hedgers will be sizable buyers of current lower priced volatility, and create a typical reversion to its mean. As the markets hover near all-time highs during the last weeks of the year, the CBOE S&P500 volatility index (VIX) traded at an intraday low of 10.93 and closed at 11.27. The CFE had 263,112 VIX futures trade yesterday and VIX options volume in the CBOE was 745,881 as VIX settled at 11.15. The VIX futures forward curve has remained steep (contango) where wider spreads between the front month volatility and back month volatility will cause spot VIX to typically track lower. Because of this curve structure, time decays have made it difficult to be on the long side of volatility during a relatively quiet…

As the S&P500 hits all time highs today, at least intra-day, VIX is trading with a 12 handle today following on the heels of dropping volatility levels from last week and the week prior. Traders and investors alike pushed VIX to as high as 23.01 on November 4 as the US presidential approached but any market fears quickly evaporated post election results despite the election night futures gyrations. Today we saw a big trade hit the the tape in the VIX. A trader sold close to 28,000 December 21 VIX 14/16 put spreads for $1.45 getting long deltas with an expectation the market sells off by expiration and the VIX trades higher. Meanwhile, the volatility of VIX as measured by VVIX continues to trade lower around the 81 handle near the yearly low of 76.17. The next macro event we have is the Italian referendum on December 4 and the Fed rate decision December 14. The Fed meeting will be watched closely and typically there is a flurry of activity VIX around rate decisions. Risk and volatility around the Italian referendum may manifest in the currency market: The referendum matters as it could accelerate the path towards euro exit. If Mr Renzi loses, he has said…

SPX futures are off roughly 18 points to 1913 as earnings take center stage. Both BP and UBS are dragging equities lower on disappointments. Both Credit Suisse and JP Morgan have cut 2016 year end estimates for the S&P 500. Crude is off nearly 4% while gold is modestly lower. The cash VIX ended 19.98 yesterday. The VIX futures are all higher before the open with the front three VIX futures in backwardation. Over the last two weeks, implied volatility levels of the S&P 500 have dropped back to levels more consistent with “current economic data”, according to Goldman (VIX futures term structure graphed below). Goldman believes fair VIX levels to be in the high-teens to low-20’s given where we are in the economic cycle. Two weeks ago, the VIX futures were disseminating much more short term fear/stress as the futures moved into a very pronounced backwardation out to Jun/’16 as you can see by the green line in the graph. Last week, after the BOJ announcement, oil rallied as did the equities in Japan, China, the US and Europe easing fears. Yesterday, the VIX futures all closed within a point of each other in a very flat structure between…

SPX futures are off nearly 10 points to 1889.50 following crude oil lower. US crude jumped 21% on Thursday and Friday, its biggest two day rally since 2008. Implied volatility in oil (1M) remains extremely elevated sitting near highs last seen in early 2009. The VIX term structure remains very flat with all futures within .82 of each other around the 22.5 level. The VIX futures are all up modestly this morning due to the negative equity tone. There has been a lot of chatter about the VIX being a bit subdued relative to current S&P 500 realized volatility. However, Goldman, in a piece released today, notes that a current VIX in the low 20’s (VIX 22.34) is consistent with the economic data thus far in early 2016. They do note that according to their model that a VIX of 25 would be consistent with zero US GDP while -2% GDP growth would be consistent with a 30 VIX. Current VIX levels suggest the options market is pricing “weak” but not recessionary US GDP. The chatter of a weak VIX relative to S&P realized volatility does have some merit, however. Goldman notes that the VIX has “underperformed its beta to…

SPX futures are up over 1% to 1936.75 and crude oil is rallying back by about 1.5%. The cash VIX finished 24.30 yesterday after a fairly wild ride in the S&P 500, which finished positive on the day. The VIX futures are all lower this morning given the positive equity tone. Another day another new low for crude oil? One thing is certain, levels of implied volatility in the options of crude have reached its highest levels since 2009. The economic slowdown in China and a glut of reserves globally seem to be the driver of the sell off in crude and the ensuing volatility. The former PIMCO co-CEO, Mohamed El-Erian, believes we may simply be “repricing to a new volatility paradigm.” Robert McNally of Columbia University delivered a paper last month, “Welcome Back to Boom-Bust Oil Prices”. In it he states, “Oil’s short run demand and supply inelasticity portends to prolonged boom-bust cycles. The absence of an effective short-term price stabilizer will increase investor uncertainty about longer-term prices… As we see daily now, global equity, bond and currency markets are being roiled by violent oil price moves; oil is the tail that is wagging several macroeconomic and financial dogs.”…

SPX futures are modestly higher by 2 points to 2017. WTI crude is up a few cents for the first time in five sessions with the possibility of more economic stimulus from China. The US economy grew by 2% in the third quarter, bolstered by consumer spending. Spot VIX dropped below 20 yesterday, losing nearly 10% to finish 18.70 (graph below). The VIX futures are relatively flat with a slight negative tone as we head to the equity open. The CBOE is making a couple of changes to the Russell 2000 Index (RUT) options beginning January 2016: The first is that RUT Weeklys will be changed to PM settlement rather than AM. A PM settlement means that the Weeklys, which are listed roughly 8 days prior to expiration, will cease trading at 3PM EST on Friday of expiration rather than Thursday, the night before. This puts the Weeklys in line with Quarterlys with a PM expiration leading to Quarterlys (RUTQ) to change symbols to match Weeklys as RUTW. AM-settled Weekly RUT options will ceases trading on 1/21/16. Effectively, this will make the Russell 2000 Index options a PM settlement for end-of-week, end-of-month, and end-of-quarter options. The standard RUT options series…

So will this be the first rate hike since 2006? We’ll know for sure on December 16 at 2PM EST. According to the Fed funds futures market there is an 76% chance that the Fed will hike tomorrow. The SPX futures are up 13 points this morning as crude has moved slightly higher. The VIX futures are all lower this morning on the positive equity tone. The VIX futures term structure is fairly flat with only 2.5 points separating the whole curve. Just browsing the sector ETFs, a few notables come to the forefront. XLE (Energy) 1M implied volatility is trading rich to 1M realized by 6.19 points. That’s a reading in the top 10% looking back 3 years. Utilities show a similar reading, in the top 7% of 3 year readings. One-month IV on a stand alone basis in the top 10% of 3-year readings across the board: XOP, XRT, XLU, XLK, XLB, XLI, XLV, XLF, XLP, and of course XLE. All of 3-month, 6-month, and 1-year IV disseminates the same thing. This all shouldn’t come as too much a shock given that the Russell 2000, S&P 500, and Q’s are all in the same boat. After dropping 3.7%…

SPX futures are up 7 points to 2086.75 on hints of a pickup in global manufacturing data. Expectations of a rate hike by the Fed will hinge on the nonfarm-payrolls report due out on Friday. The spot VIX finished up a point yesterday to 16.13. This morning the VIX futures are lower across the board given positive equity tone. Three-month S&P 500 Index implied volatility (14.9) is roughly a point under its 5-year average. The same cannot be said for the Russell 2000 with 3M IV a whole 3.85 points below its 5-year average. Relative to the S&P 500, the Russell 2000 3M IV is trading very cheap historically (5-year graph below). It’s been typical to see the spread narrow during times of a stronger economy and expand during times of economic or market stress. This makes sense in that the Russell 2000 has names that are less mature, with high growth rates, and are more susceptible to economic conditions. The present 3M IV spread differential (Russell – S&P) is 2.85 vol points. The 5-year average is 5.6 and the 10-year average is 6.3. That differential is in the bottom 4% of readings for both 5- and 10-years. You may…

SPX futures have opened relatively flat this morning given the lack of eco data on the docket. With banks closed on this Veteran’s Day, that’s to be expected. The spot VIX finished relatively flat yesterday (15.30). The VIX futures are modestly lower on what appears to be a very slow day today. The CBOE disseminates a “market-based estimate of the average correlation of the stocks that comprise the S&P 500 Index (SPX).” The CBOE began doing this in 2009 with data backdated to 2007. At any one time, there will be two maturities of these CBOE S&P 500 Implied Correlation Indexes dated roughly one and two years out. Currently, ICJ represents the Jan 2016 expiry, while JCJ represents Jan 2017 expiry. These tickers measure correlation among the price returns of the SPX components implied through both the SPX options and the single-stock options of the 50 largest components of the SPX. Recall that when you trade options (stock or index), implied volatility simply reflects the market’s expectation of future price return volatility in that name. However, when you trade options on an index, two factors go into pricing that implied volatility: individual volatilities of the index components; and, the correlation…

SPX futures are higher by 1.5 points to 2075.25. The odds of the Fed raising rates by year-end climbed to 50% from 33% in early October (Bloomberg). About half of the S&P has reported earnings with 2/3rds beating estimates. The energy sector is expected to be this season’s underperformer with estimates dropping 65% year-over-year. The spot VIX finished 15.07 on Friday. The VIX futures are ever so slightly lower across the board on the positive equity tone this morning. The final week of October saw the spot VIX move up roughly .61 points to 15.07. The VIX futures, however, only moved up by 1/8th of a point across the board in a very slight parallel shift. One-month S&P 500 Index realized volatility has dropped back to 11.8%, within 1 percentage point of levels that we saw right before the August 24th vol pop. That August vol pop brought a very distinct peculiarity not seen before. Recall that back in late August, we saw the VIX close higher than the RVX (Russell 2000 VIX) for the first time ever. Now, however, the RVX has moved back in line at a 4+ point vol differential (graph below). The 5-year average is right…