Say Hello To The New Uptrend In VIX And VIX Futures

Recap of the Week: 4/7/14 - 4/11/14

We saw a bit of weakness in the market last week with SPX down 3 of 5 days. VIX largely took the movement in stride, indicating that market participants continue to believe that dips will be bought, or at least, that this particular dip will be bought. We saw a signal to sell XIV / buy VXX on 4/10 as the VXX Bias and WRY MACD moved to positive on Thursday. The next day we saw VIX move as high as 17.85, before closing at 17.03 (+7%). This value of VIX is unusually low for a situation where SPX lost 3% over the course of 2 consecutive days (actual volatility for the week was 19.5). A VIX in the low/mid-20s would be more appropriate given historical comparisons (see this tweet after this Thursday's 2% sell off). No, the VIX is not "broken" here -- this just indicates that market participants do not see the need to buy puts to hedge their positions since the market has been in the pattern of quickly recovering from 5% dips in this new QE era.

Key Points & Outlook

- After a false break lower the week of 3/31 - 4/4, VIX opened up higher this week, retraced to last week's close by Wednesday, then continued up to close at a 4-week high. This kept the longer-term uptrend that started the week of 1/21/14 intact. VIX weekly chart, below, shows the 9-ema rise above the 36-ema and test it twice so far. Also note the positive slope of the 36-EMA and 50-SMA.

- (Remaining Key Points & Outlook are available to Members only. Please login to the Members' Forum to read the remainder of this article. If you're not yet a member you can join via the Subscribe page.)

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Major Shifts In Volatility Structure
We've watched many significant developments in the world of VIX and VIX futures unfold over the past two months and have been discussing these events and their implications in our Members' Forum. Below I've jotted down a summary of points from our recent posts to provide a glimpse of these conversations. 

(You can get access to the Trading Volatility Forum as well as our VIX Futures data and analytics for just $40/month. See the Subscribe page for details.)

2/24/14 - Theme: Rising actual volatility (HV20 & HV60) in the S&P 500 is a sign of an aging market and signifies shifting market sentiment.
- VIX has shown a bit of reservation over the latest two week rally.
- Do not expect XIV to behave in the same way in 2014 as it did in 2013; Expect choppy trading and weaker bounces like what we are seeing now. 

2/28/14  - Theme: Disappearance of the roll yield and a higher VIX base

- VXX Bias has narrowed -- almost no negative roll yield in VXX since early Feb

- VIX making higher lows, forming base in 14s

- Near-term VIX futures not selling off this time around. Trending up since Feb 18.

- Investors not selling VIX futures this time around

3/18/14  - Theme: Market Indecision and VIX Doubt In The Latest S&P Rally

- VXX Bias remains thinly negative

- VIX indicating lingering uncertainty despite S&P rally

- Continued rise in level of actual volatility in SPX, specifically HV60
- VIX/VXV bouncing above & below 0.92 threshold, indicating a high level of indecision

3/28/14  

- Continued indecision with VIX range-bound
- Watch for development of more negative VXX Bias

3/31/14 

- Break of the VXX trendline indicates lower prices to come

4/3/14 

- Weak market action in NDX and Russell 2000 prompts reduction in XIV position. Not a good time to aggressively short volatility.

4/4/14

- No show of fear yet despite selling in SPX. Watch out for further downside on Monday (4/7), 

4/10/14

- Change in VXX Bias and WRY MACD signal a move higher in VXX. 

VIX Nears A Floor After A Week Of Heavy VIX Selling

VIX took a holiday as well this week falling 11.9% from last Friday's close. The VIX Futures term structure contango steepened as all months along the curve fell in proportion to VIX. Here's the week over week change in term structure:

From our daily forecasts we can see that after a month of elevated spike risk, the VXX Spike Risk forecast fell below the 5.0 "danger zone" on the evening of June 26th and remained there this week, with VXX losing 12% since that time (and XIV +13.3%).

Spot VIX is starting to press down towards the VIX "floor" set by actual market volatility over the past 3 months (HV60), with VIX now just 5% higher than HV60. We could still see VIX press down into the 13s, but I don't expect it to head much lower (see green circles below).

UPDATED 7/8: Corrected week-over-week term structure chart and VIX % change

Another Big Week For VIX - Is There More Upside?

Another week of gains for VIX (+16.5%) has made for a +30.9% move over the past 2 weeks. VIX futures gained as well this week, driving VXX up 3.4% and ZIV down 0.8%. Below is a view of the VIX futures term structure week over week:

While the VXX bias remained dismally low all week, on Tuesday evening our VXX Spike Risk Daily Forecast algorithms moved into the danger zone with a reading of 5.9. Since then VXX has gained 6%.

Our Trading Volatility+ members had the opportunity to use this information to act accordingly and mitigate risk in their trades. For just $2/day via a 6-month subscription, having access to this insight to help mitigate losses and improve gains is an absolute bargain.

XIV is now down 7.0% since our Trading Volatility Insiders received notice that we were drastically reducing our holdings on May 17th. We'll continue to keep Trading Volatility Insiders updated on all our trades and provide other market insights at no additional charge for all Trading Volatility+ subscribers.

Access to the daily forecasts, our trade notifications, and everything else outlined on the Trading Volatility+ page is available through subscription. For those interested we are currently offering a $120 discount on 6-month memberships through June 20th as part of our service launch celebration.

VIX Futures Market Update - 5/28/13

Last week saw a rise in volatility across the entire curve, with spot VIX leading the way at +13.12%.

With this move, both the short term futures inverse fund (XIV) and medium-term futures inverse fund (ZIV) lost ground on the week at -3.8% and -3.6%, respectively. Trading Volatility Insiders were informed on May 17th that we reduced our holdings in both of these funds to just half positions, thus reducing our exposure a bit until there's a better trade setup.

Trading Volatility+ subscribers will be keeping a close eye on our Daily Forecasts and VIX Futures Data as market conditions change in order to identify the next trading opportunity. At this point the roll yields for XIV and ZIV remain positive but are relatively small and provide only a slight tailwind. The equity markets are showing some signs of exhaustion in this rally and the VIX futures continue to indicate that caution is warranted.

Subscribers to Trading Volatility+ can also choose to receive updates from the Trading Volatility Insider service which includes notifications of our trade entries/exits at no additional charge.

You can sign up to become a member at the subscribe page. We are currently offering a 25% discount on 6-month memberships through June 20th as part of our service launch celebration.

Weekly Wrap 4/12: Easy Money

Pretty nice week for those owning XIV with a 8.8% gain.  Term structure and VIX declined substantially and remain in contango producing a roll yield over 2% per week for XIV and almost 3% for ZIV (see VIX Futures Data page).  View of the term structure week over week:

Looking Ahead:
Next Wednesday April VIX futures expire and all months roll forward. You can expect April VIX and spot VIX converge as we get closer to Wednesday.  Right now April is ~5% higher than VIX so there's some  premium left but not much. Don't expect disproportionate downward moves from VXX this time around.

We've been in a pattern in the market lately where it is ridiculously easy to make thousands of dollars just buying the dips of XIV in the morning and selling during the afternoon melt-up. Cash out and repeat the next day. Seems to be a common occurrence and everyone is on to it, making me wonder just how much longer that pattern will last. This is trend we are currently in and I choose to play along rather than try to short it, but I remain very cautious with what I hold overnight.

Checking in on the VXX Daily Forecast for Monday, we can see that it has changed very little over the past week due to a pretty consistent contango term structure and positioning of front month futures relative to VIX. The bias remains slightly negative after today, however the risk of a spike edged up a bit.

Weekly VIX ETF Performances vs S&P 500:
XIV:     +8.8%
ZIV:      +5.2%
VXX:    -9.2%
UVXY:  -17%
SPY:     +2.3%

Weekly Wrap and the Week Ahead

A slow and steady week in VIX futures brought down all points along the curve with some additional emphasis on the front two months. Overall the term structure remains somewhat compressed, with just 4.7 points separating 1st and 7th month. 

There was a slight divergence in correlation between XIV and SPY today as we closed at new SPX highs - a signal for some caution in both XIV and SPX longs. From the intraday SPY arbitrage model:

Treasuries and high yield corporate bonds diverged  from SPY during the week as well, widening the gap on the daily SPY arbitrage model, with SPY trading at a $5.00 premium to the model:

And yet there's no reason VIX can't head lower given that actual volatility over the past 3 months (HV63) is just 10.8.

The Week Ahead In VIX Futures

Very little changed on the week for VIX futures, with most months only gaining 1-2%. Spot VIX however came off its low of 11.05 last week and gained 22%. Week-over-week term structure (does not include March VIX futures which expired this week):

The term structure may look normal but if you consider the steepness of the curve you'll see it flattened a bit this week, down to just 4.5 points separating 1st and 7th month (from 5.8 points last week).  Month 1 to month 2 flattened as well, down to 1.25 points from 2.1 last week. This results in a relatively small positive roll yield in XIV, which by itself, isn't likely to get you very far.

Forward implied volatility remains reasonably priced relative to 1- and 3-month historical volatility, with a ~25% premium. From the VIX Futures Data page:

Of course most of next week's action will likely be influenced by the outcome of the Cyprus bailout negotiations. If they can reach a favorable outcome, VIX is likely to fall back toward 1- and 3- month historical volatility, currently near 11. There are many opinions on what will happen but I found this piece from the former Vice Chairman of Moody's to be particularly interesting.

Lastly, a chart of the intraday SPY arbitrage model from today. Model components broke from tracking the S&P's +0.8% move today, with treasuries and volatility remaining flat and high yield credit being sold.

The Week Ahead In VIX Futures

Last week wrapped up with VIX and front month futures down heavily, to the point where our normally smooth curve is starting to resemble a cliff.  VIX Futures term structure week over week:

While it is not abnormal to see the front part of the curve steepen as front month futures converge with spot VIX as expiration draws closer, forward 30-day volatility (VIX) is now less than actual realized volatility over the past one and three months, suggesting that VIX is underpriced (a negative volatility risk premium).

Historical volatility vs implied volatility chart from Friday:

With March futures currently 11% above spot VIX it should be noted that this convergence can happen by having a rising VIX, not just a declining front month as some may have grown accustomed to.

VIX Futures Weekly Wrap

The big news in the VIX world this week was Monday's 34% gain. And while the S&P 500 retraced the losses to close out the week barely green (+0.17%), VIX remained elevated finishing +8.4% on the week.

Unlike last week, VIX Futures followed the move in spot VIX in a more standard fashion with some additional emphasis on the first three months, compressing the term structure by 1.4 points:

Despite this move in VIX during the week, the volatility risk premium actually fell to 23% as actual volatility over the past month (HV21) rose to 12.55 from 9.89 last Friday. This suggests VIX is pretty well priced given recent market action.

Weekly VIX ETF scoreboard:
VXX:       +8.2%
UVXY:  +12.8%
XIV:       -11.2%
ZIV:         -3.4%
SPY:     +0.17%

The Return of Volatility: Week in Review 2/19 - 2/22

Things started to get a bit wild in the equity markets last week. After the overly-quiet week of  Feb 11-15 where realized volatility for S&P 500 during the week (HV5) hit a low 1.7, VIX picked up a bit gaining 12.9% on the week after marking a new low of 12.08 on Monday. By the end of the week HV5 was all the way up to 14.2!

VIX futures lagged spot VIX, remaining tame in comparison with only front month futures showing any sign of concern (see term structures below). However, this movement of M1 did result is a marked reduction of contango to second month and is a signal that VXX is likely to head higher, as I noted last Wednesday.

VIX Futures Weekly Wrap: New 67-Month Low in Historical Volatility (HV126)

It seems that with every week that goes by volatility sets a new record low of some sort.  This week was no exception as actual realized (historical) volatility of the S&P 500 over the past six months (HV126) hit 11.34, a 67-month low.

Spot VIX edged up on the week to 13.02 (+0.9%) while VIX futures all along the curve were pushed lower, with the spread of the term structure at the front of the curve (months 1 and 2) moving wider to -1.3 while the back end (months 4 and 7) compressed to -1.95.

Term structures:

XIV and ZIV remain bullishly biased given that the term structure is in contango and historical volatility continues to decline. As I mentioned in my article this week at Seeking Alpha, VIX can certainly move lower from here and take VIX futures and VXX with it. However, the risk/reward on inverse VIX plays such as XIV and ZIV is currently not very appealing and should be owned with extreme caution.

Weekly VIX ETF scoreboard:
- VXX:     -0.43%
- UVXY:  -1.04%
- XIV:      +0.32%
- ZIV:       +0.93%
- S&P 500: +0.31%

As a reminder, you can always see the current VIX futures term structure, past VIX futures data, and historical volatility on my VIX Futures Data page.

VIX Futures Weekly Wrap

VIX and VXX got a little perky during the week, perhaps signalling a move higher soon, but in the end the spot VIX (+0.08%) and VIX futures edged up only slightly from a week ago along all points on the curve. Here are the term structures:

Weekly scoreboard for VIX Futures ETPs and S&P 500:
- VXX: +0.61% 

- XIV:  -1.58%
- ZIV:  -1.10% 
- SPX: +0.68% 

As of the close today all indicators for VIX trades are pretty well balanced, suggesting there aren't any multi-day trades in either direction that are likely to produce a profit with any high degree of certainty. There is still an ever-so-slight bias towards a long XIV position as mentioned yesterday but after today's large move I think it's better to wait for the next set up.

VIX Futures Weekly Wrap

We saw an unusual week of positive correlation between VIX (+3.5%) and SPY (+1.3%), a continuation of a daily occurrence of positive correlation that I identified last week.  Early in the week we also saw VIX hit its lowest close since 4/20/2007 at 12.43 before heading higher over the rest of the week.

VIX Futures Weekly Performance:

Feb-13	Mar-13	Apr-13	May-13	Jun-13	Jul-13	Aug-13
-4.1%	-7.4%	-6.7%	-5.9%	-5.7%	-5.5%	-5.3%

Front month (February), down 4.1% to 14.05, was not able to match the losses experienced by other months despite pressing down to new multi-year lows of 13.65. This resulted in a flattening of the front side of the term structure curve, reducing the negative roll yield of VXX.

Based on these changing conditions and other indicators I established a long position in VXX at $22.70 near the close on Wednesday and I continue to hold it, although I will likely ditch it Monday if it doesn't get going.

Weekly scoreboard for VIX Futures ETPs vs S&P500:
- XIV: +4.2%
- ZIV +6.4%
- SPY: +1.3%

And the daily close of the VIX Futures term structure this week:

VIX Futures Weekly Wrap

Generally a bit of a slow week with the market continuing to drift higher after the big move up last week.  Traders continued to unload option protection along the entire curve, with spot VIX closing at a 67-month low of 13.36.

VIX Futures Weekly Performance:

Jan-13	Feb-13	Mar-13	Apr-13	May-13	Jun-13	Jul-13
-7.2%	-3.9%	-2.2%	-1.6%	-2.6%	-2.7%	-2.8%

Front month (January), down 7.2% to 14.15, saw the heaviest selling and dropped to the lowest close for front month VIX futures since 6/19/2007. January futures expire next Tuesday at which point short term VIX ETPs (XIV, SVXY, VXX, UVXY) will start to use February as front month futures, which will help fuel XIV/SVXY.

March futures and beyond fell a slightly, with the back end of the curve compressing a bit, decreasing the roll yield and making ZIV a little less attractive in the short term.

A look at the VIX futures weekly performance vs SPY:

• XIV: +3.9%
• ZIV: +1.9%
• SPY: +0.5%

Finally, the VIX futures term structure at the end of each day this week:

VIX Futures Weekly Wrap

It was a volatile week with a ridiculous Monday-Tuesday rally driving every point on the VIX futures curve one full standard deviation below historical averages before the big move up in the second half of the week.  Front month VIX futures (January) saw big gains this week as traders rolled over their protection with December options expiring (as predicted last week). 

VIX Futures Weekly Performance:

Jan-13	Feb-13	Mar-13	Apr-13	May-13	Jun-13	Jul-13
+6.1%	+1.6%	+1.3%	+0.5%	+0.2%	-0.5%	-0.2%

After seeing these numbers you might be surprised to learn that S&P 500 actually closed up 1.1% on the week.  At this point it seems that traders who wanted to buy protection have done so, making a short-term trade in shorting front month volatility (by buying XIV) somewhat attractive. However, due to the complete unpredictability of negotiations in Washington as we approach year end this still a bit like playing with fire. Might as well stay in cash and enjoy the holidays.

VIX term structure at the close of each day this week:

 

VIX Futures Weekly Wrap

During a sideways week of indecision for the broad US equity market (SPY down 0.2%), it can be helpful to break down the movement in VIX futures to provide some insight into market sentiment. 

VIX Futures Weekly Performance

Dec-12	Jan-13	Feb-13	Mar-13	Apr-13	May-13	Jun-13
5.0%	-0.3%	-0.5%	0.5%	0.7%	0.7%	0.9%

Front month VIX futures rose 5% as traders bought some downside protection in the event that congress does not come up with a positive deal on the fiscal cliff.  The price and recent movement of January futures and beyond indicates that most traders are not particularly worried about long term effects of the discussions. If no deal is reached next week it is likely that we’ll see a move higher in January VIX as well as traders start rolling over protection to replace December options.