Skip to main content

VIX Monthly Review – October 2017

With October just about in the books, let's do a review of where volatility went this month. October is typically one of the most volatile months of the year. For what it's worth, a 20 year seasonality chart shows the first week of October as the seasonal high for VIX, with an average of 24. This is in direct contrast to this year's action when the same time period saw the return of repeated sub-10 VIX prints. This certainly raises the question as to whether VIX seasonality applies in any way this year with VIX again near all-time lows.
VIX Seasonality, 1997-2017
In fact, the hourly chart of the month of October shows a slow but steady climb in spot VIX. After staying under 10 for the entire first week of October, VIX put in a low at 9.11. Since then VIX has seen a few mini-spikes. The first real spike of the month was on October 19 in the premarket session, before US traders even had a chance to wake up. A second and slightly larger spike put in the high for the month at 13.2 on October 25 then quickly retreated. Despite these spikes lasting mere hours, a trend emerged for the base of VIX with a slow but steady climb upward. On October 30, VIX finished at 10.5.

Contango is improving from its October 25 low,
VXST:VIX is a little cautious

The VXST:VIX ratio is one of my favorite indicators to help me determine if short-term volatility has the potential to spill over into the VIX and build into larger spikes. I won't go into a detailed discussion of this ratio today, but a good cutoff is seeing the VXST:VIX ratio stay below 0.97. Once it begins approaching and surpassing 1.0, it can often signal a runaway volatility scenario where short-term volatility starts fueling volatility into the monthly time frame. Overall the VXST:VIX ratio has increased over the last month. We even exceeded 1.0 briefly on October 25, and the term structure between November and December futures almost flipped into backwardation. But almost as quickly as the market began racing toward that inflection point, VIX quickly retreated and contango was maintained. The elevated VXST:VIX could signal caution for volatility shorts.
M1M2 Contango at a whopping 15% early in October.
The Nov-Dec Contango has been more muted until recently.

November-December contango started in the very low 4% range at the beginning of the month. At the time, contango between October and November futures was running at a very robust 12-14%, but whenever I see a lower contango period approaching, I get very cautious about carrying a large short volatility position as profits are likely to be slower in the future. This certainly confirmed this month as prices of volatility funds are essentially unchanged from 2 weeks ago. But November-December contango has been increasing since the October 25 spike, and December-January contango has consistently been a strong 8%+, so volatility shorts have that to look forward to in a couple weeks. It might be an indicator to start shorting volatility on upcoming spikes.

Overall, signals are a mixed bag for volatility right now. The VIX base is slowly rising, but the futures structure is still in contango and improving. VXST:VIX is elevated compared to the beginning of the month, but still in an acceptable range for volatility shorts. In a period such as this, it makes more sense to look at overall market action and internals to help me guide my trading decisions. Of course no one can predict exactly where volatility will be tomorrow or even a month from now, but there certainly appear to be some good trading opportunities coming up.

Comments

Post a Comment

Popular posts from this blog

The VXST:VIX Ratio – Knowing when a VIX spike is out of steam

November 9, 2017 – Today was a terrific day for trading volatility. Plenty of money could be made on both sides of the trade, and unless you got greedy, everyone left happy. Today was also a textbook example of an indicator I like to use to identify VIX tops: the VXST:VIX ratio. I mentioned it briefly in my last entry, but I'll expand on it a little today. Without going into mathematical definitions, VXST is VIX's jumpier, angrier baby brother. If you know the simple definition that VIX is the expected volatility over the upcoming 30 days, VXST is the equivalent for the upcoming 9 days. Think of it as volatility with an even shorter time horizon than VIX – kind of like zooming in on the next few days. It tends to rise faster than VIX, and drops faster than VIX. The VXST:VIX ratio is just a simple way of telling us which value is greater, and by how much – VXST or VIX. The normal state of a healthy, up-trending market is that VXST is lower than VIX, similar to the way
3 comments
Read more

Building a Core Volatility Short Using UVXY Options

Several volatility trading strategies advocate using a “core” short volatility position to benefit from the drag of contango and beta slippage on these products. Holding a permanent short position in UVXY would allow a trader to benefit from the average 60-90% yearly loss these funds suffer from. However, establishing or maintaining this permanent short position may be undesirable due to short borrowing fees, margin requirements, or even impossible if the shares are unavailable either due to market conditions or choice of broker. But just because you can't short UVXY or TVIX directly doesn't mean you need to miss out on these downward moves year after year. Consider building your core with options. This trade involves selling short calls. The premium collected on the trade approximates how much one would earn from the average natural decay of holding the underlying ETF in that period of time. This trade has the advantage of being much less volatile than a pure UVXY sh
1 comment
Read more

Decay and SVXY/XIV: Frequent VIX Spikes Hurt!

The easiest trade in the market is in XIV and SVXY – just buy the dip, right? Wrong! In very calm markets that may be true. Gains in these funds are compounded daily as long as volatility is decreasing and futures are in contango. It really is a mindless trade when things go well. From January 1, 2017 to its all-time high on July 24, XIV rose 105%, in what was mostly a steady, daily rise with few interruptions. After late July though, the behavior on the XIV and SVXY changed. The overall term structure of the VIX futures is certainly a little higher than it was in July, but both of these funds are down 17% from their highs in the last 6 weeks, even though VIX continues to stay in the low teens. What's going on under the hood? Beginning in late July the market began to see frequent VIX spikes, on average once every 7-10 days. Although these spikes weren't high in absolute terms, on a percentage basis they were quite large: Date VIX HIGH % S
3 comments
Read more