Volatility Monitor

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Volatility Brief – 12/22/16

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Volatility Monitor

posted by CAPIS on 12/22/2016 at 11:16 am
by CAPIS on 12/22/2016

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…

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…

Volatility Brief – 12/07/16

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posted by CAPIS on 12/07/2016 at 11:14 am
by CAPIS on 12/07/2016

On this day, 75 years ago, the Japanese bombed Pearl Harbor killing 2400 Americans and wounding 1500. The day after, President Roosevelt spoke before Congress, and what is now the most recognized  quote: “Yesterday, December 7, 1941–a date which will live in infamy–the United States of America was suddenly and deliberately attacked by naval and air forces of the Empire of Japan.” He asked Congress to declare war on Japan and drawing the US into World War II. So let’s remember those Americans lost on that day, and those lost in wars since then. Yesterday 422,621 VIX options changed hands and on the CFE volume was saw 194,868 VIX futures trade. Weekly VIX expiration is today but the last day to trade VIX weeklies was yesterday. As the markets make new all time highs, the VIX is trading nearly the yearly intra-day low of 11.02 (closing low 11.34) set back in August. The term structure continues to be in contango which makes rolling costs expensive for long term holders of VIX products. The low levels of volatility are a sign the markets have come to term with what a Trump presidency would mean. Trump is generally seen as business friendly and markets expect that softer…

On this day, 75 years ago, the Japanese bombed Pearl Harbor killing 2400 Americans and wounding 1500. The day after, President Roosevelt spoke before Congress, and what is now the most recognized  quote: “Yesterday, December 7, 1941–a date which will live in infamy–the United States of America was suddenly and deliberately attacked by naval and air forces of the Empire of Japan.” He asked Congress to declare war on Japan and drawing the US into World War II. So let’s remember those Americans lost on that day, and those lost in wars since then. Yesterday 422,621 VIX options changed hands and on the CFE volume was saw 194,868 VIX futures trade. Weekly VIX expiration is today but the last day to trade VIX weeklies was yesterday. As the markets make new all time highs, the VIX is trading nearly the yearly intra-day low of 11.02 (closing low 11.34) set back in August. The term structure continues to be in contango which makes rolling costs expensive for long term holders of VIX products. The low levels of volatility are a sign the markets have come to term with what a Trump presidency would mean. Trump is generally seen as business friendly and markets expect that softer…

Volatility Brief – 11/21/16

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posted by CAPIS on 11/21/2016 at 2:44 pm
by CAPIS on 11/21/2016

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…

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…

Flight to Quality: Insights from the bond options skew

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posted by Jay Vanerstrom on 03/22/2016 at 12:43 pm
by Jay Vanerstrom on 03/22/2016

This morning the US markets awoke to news of terrorist bombings in Brussels. The normal reaction to unexpected news that could produce negative economic activity is one of flight to quality. Simply said, we see a shedding of riskier assets (stocks) combined with movement into the relative safety of Treasury notes/bonds. The decision to protect assets is usually an automatic reaction to significant, market disrupting news; deciding when it is safe to wade back into riskier assets though can be difficult to gauge. By viewing the volatility skew for options on treasury bond futures, you get a picture of flight to quality forces in effect and and when they wane. Be careful when the bond skew smiles. When charting volatility for options on bond futures, a normal skew will be generally downward sloping, with out of the money puts trading at a higher volatility than similarly out of the money calls (X-axis = strike price / Y-axis = implied volatility).  During flight to quality moves the market experiences concentrated periods of buying in Treasury bonds and their related futures contracts. This need to be long the bond market is often expressed conditionally through the purchase of out of the money…

This morning the US markets awoke to news of terrorist bombings in Brussels. The normal reaction to unexpected news that could produce negative economic activity is one of flight to quality. Simply said, we see a shedding of riskier assets (stocks) combined with movement into the relative safety of Treasury notes/bonds. The decision to protect assets is usually an automatic reaction to significant, market disrupting news; deciding when it is safe to wade back into riskier assets though can be difficult to gauge. By viewing the volatility skew for options on treasury bond futures, you get a picture of flight to quality forces in effect and and when they wane. Be careful when the bond skew smiles. When charting volatility for options on bond futures, a normal skew will be generally downward sloping, with out of the money puts trading at a higher volatility than similarly out of the money calls (X-axis = strike price / Y-axis = implied volatility).  During flight to quality moves the market experiences concentrated periods of buying in Treasury bonds and their related futures contracts. This need to be long the bond market is often expressed conditionally through the purchase of out of the money…

VIX Closes Under 20

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posted by CAPIS on 02/02/2016 at 8:15 am
by CAPIS on 02/02/2016

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 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…

Index Implied Volatility- Russell 2000 v S&P 500

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posted by CAPIS on 01/28/2016 at 8:00 am
by CAPIS on 01/28/2016

SPX futures are up roughly 7 points to 1882. Yesterday, the FOMC kept rates unchanged all the while admitting tighter financial conditions and international risk. Goldman analysts expect a rate hike in March. As we noted last week, Goldman also expects weak but not recessionary economic data for 2016 and a VIX in the low 20’s. Facebook (FB) earned more than $1 billion in quarterly profits for the first time and the positive equity futures are feeding off that. The cash VIX finished 23.11 yesterday, up .61 on an up and down day. The VIX futures are all lower this morning by .2 on average given the positive equity tone. The Russell 2000 is sitting roughly 23% below its 2015 record highs while the S&P 500 has only lost 12%. This is pretty typical as smaller capitalized Russell names generally are more prone to economic trouble than the more established larger caps. When the overall market comes under strong selling pressure, it’s common to see the Russell 2000 implied volatility spike to a greater degree than the S&P 500. In other words, the cost of options to hedge small caps outpaces that of the large caps. Surprisingly, during the equity…

SPX futures are up roughly 7 points to 1882. Yesterday, the FOMC kept rates unchanged all the while admitting tighter financial conditions and international risk. Goldman analysts expect a rate hike in March. As we noted last week, Goldman also expects weak but not recessionary economic data for 2016 and a VIX in the low 20’s. Facebook (FB) earned more than $1 billion in quarterly profits for the first time and the positive equity futures are feeding off that. The cash VIX finished 23.11 yesterday, up .61 on an up and down day. The VIX futures are all lower this morning by .2 on average given the positive equity tone. The Russell 2000 is sitting roughly 23% below its 2015 record highs while the S&P 500 has only lost 12%. This is pretty typical as smaller capitalized Russell names generally are more prone to economic trouble than the more established larger caps. When the overall market comes under strong selling pressure, it’s common to see the Russell 2000 implied volatility spike to a greater degree than the S&P 500. In other words, the cost of options to hedge small caps outpaces that of the large caps. Surprisingly, during the equity…

Proper VIX Level?

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posted by CAPIS on 01/25/2016 at 7:58 am
by CAPIS on 01/25/2016

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 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…

Goldman S&P 500 Volatility Prediction 2016

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posted by CAPIS on 01/14/2016 at 8:06 am
by CAPIS on 01/14/2016

SPX futures are up nearly 10 points to 1891. The Powerball $1.5 billion had a winner(s). Obviously not on this desk given that I am present today. Crude is up to $31 and gold is flat at $1086. Initial jobless claims came in higher than expected. The cash VIX moved to 25.22 yesterday on the 2.5% drop in the S&P 500 Index. The VIX futures are all lower in parallel fashion by .26 on average given the positive equity tone. Goldman came out with its volatility forecast for 2016. The prediction is based on analysis of trends in GDP growth rates, unemployment rate, core PCE inflation, FED hikes, and ISM data. Goldman predicts an average VIX of 19 and S&P 500 realized volatility of 17 for 2016. They also compare that with a model that simply uses US GDP growth rates which suggest a VIX of 20 and S&P realized volatility of 16.5. Additionally, when they use global GDP growth forecasts, VIX comes in a bit higher at 22 and S&P realized volatility of 19. They also note that the VIX has a very strong cyclical component as you would expect. According to Goldman, “the unemployment rate, ISM new orders,…

SPX futures are up nearly 10 points to 1891. The Powerball $1.5 billion had a winner(s). Obviously not on this desk given that I am present today. Crude is up to $31 and gold is flat at $1086. Initial jobless claims came in higher than expected. The cash VIX moved to 25.22 yesterday on the 2.5% drop in the S&P 500 Index. The VIX futures are all lower in parallel fashion by .26 on average given the positive equity tone. Goldman came out with its volatility forecast for 2016. The prediction is based on analysis of trends in GDP growth rates, unemployment rate, core PCE inflation, FED hikes, and ISM data. Goldman predicts an average VIX of 19 and S&P 500 realized volatility of 17 for 2016. They also compare that with a model that simply uses US GDP growth rates which suggest a VIX of 20 and S&P realized volatility of 16.5. Additionally, when they use global GDP growth forecasts, VIX comes in a bit higher at 22 and S&P realized volatility of 19. They also note that the VIX has a very strong cyclical component as you would expect. According to Goldman, “the unemployment rate, ISM new orders,…

Crude Oil Implied Volatility Highest Since 2009

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posted by CAPIS on 01/12/2016 at 8:22 am
by CAPIS on 01/12/2016

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 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.”…

Stock Illiquidity and Option Pricing

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posted by CAPIS on 01/06/2016 at 8:51 am
by CAPIS on 01/06/2016

SPX futures are off nearly 40 points to 1973 as the Kim Jong-un (aka: Supreme Leader, Marshal of the DPRK, First Chairman of the National Defense Commission, First Secretary of the Workers’ Party, Chairman of the party’s Central Military Commission, Member of the Presidium of the party’s Political Bureau, and Supreme Commander of the Korean People’s Army) is playing with his new toy today- a hydrogen bomb. Add this to the already hostile Iran/Saudi Arabia (aka Shi’ite/Sunni) tensions and we have equity futures off nearly 2%. The cash VIX finished 19.34 yesterday, but undoubtedly will spike on the open as all VIX futures have jumped this morning. The term structure is extremely flat pre-open with only a point range among all VIX futures (20.35 – 21.1). Traders Magazine published an article last week titled Does Illiquidity of Stocks Influence Option Prices? The obvious answer is yes, which is no surprise to an ex-market-maker. The article discusses the new paper presented at the OptionMetrics Research Conference titled Stock Illiquidity, Option Prices, and Option Returns. Apparently researchers in the past were having a difficult time between the exact connection between illiquidity and option pricing, “..likely due to the effect that market makers…

SPX futures are off nearly 40 points to 1973 as the Kim Jong-un (aka: Supreme Leader, Marshal of the DPRK, First Chairman of the National Defense Commission, First Secretary of the Workers’ Party, Chairman of the party’s Central Military Commission, Member of the Presidium of the party’s Political Bureau, and Supreme Commander of the Korean People’s Army) is playing with his new toy today- a hydrogen bomb. Add this to the already hostile Iran/Saudi Arabia (aka Shi’ite/Sunni) tensions and we have equity futures off nearly 2%. The cash VIX finished 19.34 yesterday, but undoubtedly will spike on the open as all VIX futures have jumped this morning. The term structure is extremely flat pre-open with only a point range among all VIX futures (20.35 – 21.1). Traders Magazine published an article last week titled Does Illiquidity of Stocks Influence Option Prices? The obvious answer is yes, which is no surprise to an ex-market-maker. The article discusses the new paper presented at the OptionMetrics Research Conference titled Stock Illiquidity, Option Prices, and Option Returns. Apparently researchers in the past were having a difficult time between the exact connection between illiquidity and option pricing, “..likely due to the effect that market makers…

CBOE- Changes to the Russell 2000 Options

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posted by CAPIS on 12/22/2015 at 8:28 am
by CAPIS on 12/22/2015

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…

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…

Markets Reaction to the Hike

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posted by CAPIS on 12/17/2015 at 8:14 am
by CAPIS on 12/17/2015

Yesterday, the Fed hike dropped the SPX 14 points immediately. The final two hours of trading, however, saw the SPX rally 30 points. The VIX reacted by dropping from 19.6 to finish 17.68 (graph for both below). Currently the SPX futures are up 4 points to 2067.75. Crude oil dropped after the announcement while gold rallied. The VIX futures are all lower this morning in a slight flattening of term structure. The VIX futures term structure is shown below with live data in orange and the green representing the close on 12/15. The rate increase was very expected and there seemed to be no indication of any unexpected aggressive tightening going forward. The equity markets obviously seem to like that. Treasuries were also similarly pleased. The Merrill Lynch Option Volatility Estimate Index (MOVE) which tracks a weighted average of 1-month implied volatility for 2-, 5-, 10-, and 30-year Treasuries got hammered. It dropped by its most in a year and is on track for the biggest monthly decline since April 2009 (Bloomberg). Is the 6-year bull market coming to an end? Doesn’t look like it just yet. But one thing is certain.. now that the Fed has exited the monetary…

Yesterday, the Fed hike dropped the SPX 14 points immediately. The final two hours of trading, however, saw the SPX rally 30 points. The VIX reacted by dropping from 19.6 to finish 17.68 (graph for both below). Currently the SPX futures are up 4 points to 2067.75. Crude oil dropped after the announcement while gold rallied. The VIX futures are all lower this morning in a slight flattening of term structure. The VIX futures term structure is shown below with live data in orange and the green representing the close on 12/15. The rate increase was very expected and there seemed to be no indication of any unexpected aggressive tightening going forward. The equity markets obviously seem to like that. Treasuries were also similarly pleased. The Merrill Lynch Option Volatility Estimate Index (MOVE) which tracks a weighted average of 1-month implied volatility for 2-, 5-, 10-, and 30-year Treasuries got hammered. It dropped by its most in a year and is on track for the biggest monthly decline since April 2009 (Bloomberg). Is the 6-year bull market coming to an end? Doesn’t look like it just yet. But one thing is certain.. now that the Fed has exited the monetary…

Rate Hike Cometh

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posted by CAPIS on 12/15/2015 at 8:00 am
by CAPIS on 12/15/2015

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%…

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%…

December SPX Expiration & March SPX Skew

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Volatility Monitor

posted by CAPIS on 12/09/2015 at 8:29 am
by CAPIS on 12/09/2015

SPX futures are lower by 4 points to 2054.75. The biggest news due out is obviously the FOMC meeting next Wednesday. Domestic equities are heading for the third straight down day this morning. Both crude and gold are modestly higher this morning. The VIX futures are higher across the board in a modest flattening of the term structure on the negative equity tone this morning. The FOMC rate decision comes next Wednesday which should make for a far more interesting December than most. The VIX December future will expire on the open before the FOMC decision making the January VIX future (18.35) the nearest tradeable expiry. SPX December options, however, expire only two days after the meeting on December 18. Given the fact that generally the closest to expiration options (usually weeklys) see the most volume, these standard Dec options should get a lot of attention. In fact, JPM strategist Marko Kolanovic noted that the “Fed’s December meeting falls a peculiar time, less than 48 hours before the largest option expiry in many years. $1.1t of S&P 500 options (of which $670b are puts in the 1900 – 2050 range) look like a massive stop loss order under the market.”…

SPX futures are lower by 4 points to 2054.75. The biggest news due out is obviously the FOMC meeting next Wednesday. Domestic equities are heading for the third straight down day this morning. Both crude and gold are modestly higher this morning. The VIX futures are higher across the board in a modest flattening of the term structure on the negative equity tone this morning. The FOMC rate decision comes next Wednesday which should make for a far more interesting December than most. The VIX December future will expire on the open before the FOMC decision making the January VIX future (18.35) the nearest tradeable expiry. SPX December options, however, expire only two days after the meeting on December 18. Given the fact that generally the closest to expiration options (usually weeklys) see the most volume, these standard Dec options should get a lot of attention. In fact, JPM strategist Marko Kolanovic noted that the “Fed’s December meeting falls a peculiar time, less than 48 hours before the largest option expiry in many years. $1.1t of S&P 500 options (of which $670b are puts in the 1900 – 2050 range) look like a massive stop loss order under the market.”…

Russell 2000 Volatility on Sale

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posted by CAPIS on 12/01/2015 at 8:16 am
by CAPIS on 12/01/2015

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 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…

VIX and the Holiday Season

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posted by CAPIS on 11/23/2015 at 8:27 am
by CAPIS on 11/23/2015

SPX futures are unchanged for the first day of the shortened Thanksgiving week. The week will bring a decent amount of economic data, however. Existing home sales, revised Q3 GDP, and a durable goods report lead the way. The market (S&P 500) rose 3% last week and logged its seventh winning week in the last eight. The spot VIX finished 15.47 on Friday. The VIX futures are a mixed bag this morning awaiting direction. The VIX chart below shows the week-over-week that ended Friday. The term structure went from very flat to the more ‘normal’ contango structure by week’s end. The structure may steepen further given Thursday’s closed market and a half-day on Friday. Moving on into December, I wouldn’t expect your typical kink of a lower December VIX future relative to rest of the term structure. With a possible hike in interest rates and the constant threat of terror attacks globally, this year’s December should maintain a solid volatility floor. Hopefully, Black Friday will not live up to its name. In the commodities world, the gold VIX (GVZ: 17.26) is a shade under the 5-year average (19.0). Silver 1M implied volatility (25.6) is in the bottom third of 5-year…

SPX futures are unchanged for the first day of the shortened Thanksgiving week. The week will bring a decent amount of economic data, however. Existing home sales, revised Q3 GDP, and a durable goods report lead the way. The market (S&P 500) rose 3% last week and logged its seventh winning week in the last eight. The spot VIX finished 15.47 on Friday. The VIX futures are a mixed bag this morning awaiting direction. The VIX chart below shows the week-over-week that ended Friday. The term structure went from very flat to the more ‘normal’ contango structure by week’s end. The structure may steepen further given Thursday’s closed market and a half-day on Friday. Moving on into December, I wouldn’t expect your typical kink of a lower December VIX future relative to rest of the term structure. With a possible hike in interest rates and the constant threat of terror attacks globally, this year’s December should maintain a solid volatility floor. Hopefully, Black Friday will not live up to its name. In the commodities world, the gold VIX (GVZ: 17.26) is a shade under the 5-year average (19.0). Silver 1M implied volatility (25.6) is in the bottom third of 5-year…

Very Low S&P 500 Implied Correlation (Jan/2016)

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posted by CAPIS on 11/11/2015 at 8:47 am
by CAPIS on 11/11/2015

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 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…

S&P 500 Index 1M Vol Lowest Globally

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posted by CAPIS on 11/04/2015 at 8:30 am
by CAPIS on 11/04/2015

SPX futures are up 5 points to 2108 this morning. ADP Employment data showed 182k new jobs were added in the US. The US trade deficit shrunk 15% to $40.8 billion. Europe and the UK bourses are higher this morning. The VIX futures are all modestly lower this morning on the bullish tone. The spot VIX closed 14.54 yesterday. S&P 500 Index volatility (implied and realized) is right back around the subdued 2013-2014 average of a 14/15 VIX (graph below). This seems a bit peculiar given the Fed’s bias towards tightening and weakening economic data. Goldman Sachs issued a note yesterday describing just that sentiment. According to GS, “The options market seems to either be anticipating an inflection higher in the economic data, no rate hike, or an extreme lack of catalysts between now and year-end.” In fact, “S&P 500 1M implied volatility is the lowest among global equity indices.” Contrary to that, the Euro Stoxx 50, DAX (Germany), Nikkei, and Han Seng Index all have 1-month implied volatility sitting right around 19% and in the upper half of three-year readings. The point of Goldman’s research is to take what the market gives you. And the market is giving you…

SPX futures are up 5 points to 2108 this morning. ADP Employment data showed 182k new jobs were added in the US. The US trade deficit shrunk 15% to $40.8 billion. Europe and the UK bourses are higher this morning. The VIX futures are all modestly lower this morning on the bullish tone. The spot VIX closed 14.54 yesterday. S&P 500 Index volatility (implied and realized) is right back around the subdued 2013-2014 average of a 14/15 VIX (graph below). This seems a bit peculiar given the Fed’s bias towards tightening and weakening economic data. Goldman Sachs issued a note yesterday describing just that sentiment. According to GS, “The options market seems to either be anticipating an inflection higher in the economic data, no rate hike, or an extreme lack of catalysts between now and year-end.” In fact, “S&P 500 1M implied volatility is the lowest among global equity indices.” Contrary to that, the Euro Stoxx 50, DAX (Germany), Nikkei, and Han Seng Index all have 1-month implied volatility sitting right around 19% and in the upper half of three-year readings. The point of Goldman’s research is to take what the market gives you. And the market is giving you…

Russell 2000 VIX and S&P 500 VIX Back In Line

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posted by CAPIS on 11/02/2015 at 8:05 am
by CAPIS on 11/02/2015

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…

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…

S&P 500 Index 1-Month IV & Skew Near 5-Yr Average

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posted by CAPIS on 10/28/2015 at 8:18 am
by CAPIS on 10/28/2015

SPX futures are up 3 points to 2063.5 ahead of the Fed’s (non-)announcement. Of 90 economists polled by Bloomberg, all are expecting no rate hike. European and US equities are rising given the accommodative stance of the world’s central banks. In fact, many are forecasting no rate hike in the US before the new year. Gold and crude are both up this morning. The cash VIX closed 15.43 yesterday. The VIX futures are all modestly higher this morning even with the positive equity tone. SPX 1-month implied volatility (VIX) is right around its 5-year average. This, after it reached its highest levels in August since 2011. SPX 1-month skew (90%/110% of spot) has similarly retreated and is also right around its 5-year mean. All clear then right? Afterall, the world’s central banks are continuing their very friendly posturing towards equity markets. China has cut rates and lowered reserve requirements for the sixth time this year. The ECB and Chairman Draghi intimated that more stimulus is on the way. And, all 90 of Bloomberg’s surveyed economists are predicting the Fed stands pat. There are those, however, that believe you should take what the markets give you. Credit Suisse’s Mandy Xu believes…

SPX futures are up 3 points to 2063.5 ahead of the Fed’s (non-)announcement. Of 90 economists polled by Bloomberg, all are expecting no rate hike. European and US equities are rising given the accommodative stance of the world’s central banks. In fact, many are forecasting no rate hike in the US before the new year. Gold and crude are both up this morning. The cash VIX closed 15.43 yesterday. The VIX futures are all modestly higher this morning even with the positive equity tone. SPX 1-month implied volatility (VIX) is right around its 5-year average. This, after it reached its highest levels in August since 2011. SPX 1-month skew (90%/110% of spot) has similarly retreated and is also right around its 5-year mean. All clear then right? Afterall, the world’s central banks are continuing their very friendly posturing towards equity markets. China has cut rates and lowered reserve requirements for the sixth time this year. The ECB and Chairman Draghi intimated that more stimulus is on the way. And, all 90 of Bloomberg’s surveyed economists are predicting the Fed stands pat. There are those, however, that believe you should take what the markets give you. Credit Suisse’s Mandy Xu believes…

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