Super Rich Volatility and Exploding TVIX Premium
The VIX continued its downward descent last week, finishing at 17.31 down 2.6%. While the 17.31 figure appears low on the surface, when compared against realized S&P500 volatility over the last 21 days, (8%-9%) the VIX is actually trading at a substantial premium. It’s hard to make the case that volatility is cheap, especially in the face of the significantly upward sloping termstructure present in VIX futures. As of Friday’s close June VIX futures stand at 28, a whopping 11 points higher than cash VIX. What this says to me is that while the market seems intent on pushing gradually higher, traders are preparing for some sort of meaningful correction over the coming months.
It seems every time the VIX and the S&P500 move in the same direction, which historically happened very infrequently but this year has become fairly commonplace (2x last week alone), strategists begin to sound the warning bell of impending doom. While we haven’t seen any real signs of breakdown as of yet, I’m sure one these times over the next several weeks they will be right.
Options Block Events Calendar
Significant earnings scheduled for Monday include: Lowe’s (LOW), Human Genome Sciences (HGSI), Priceline (PCLN), SINA (SINA), and Southwestern Energy (SWN). Pending Home Sales are due out at 10:00 am ET and the Dallas Fed Survey is scheduled for 10:30 am ET. BMO is hosting a Metals & Mining Conference starting today and running through Wednesday the 29th.
Significant Options Research
TVIX Premium is Exploding: The story in volatility trading this week has been Credit Suisse’s decision to suspend creation units in the TVIX. This announcement came on the heels of TVIX trading surpassing trading in the VXX for the first time in history. Unfortunately the growing popularity in this 2x leveraged ETN has put Credit Suisse in this precarious position, forcing their hand to cease creation due to internal limit constraints. We highlighted in previous posts of the overwhelming consensus that the TVIX would begin to trade at a premium to net asset value as a result of the suspension, but little did we expect a premium of this magnitude. As of Friday’s close the TVIX currently stands at 16.66, a 20% premium to net asset value!
Just how volatile is volatility? The VIX Views blog pondered this question and came up with a few nifty graphs, which you can check out here: Vol of Vol. Measured from December of 2005 to January of 2012, rolling 21-day realized volatility in short-term VIX futures and spot VIX is roughly 3x and 6x respectively as volatile as S&P500 realized volatility. As of Friday’s close March at-the-money VIX options closed at 110 volatility roughly 8.5x SPX at-the-money implied vol of 13.
Where has the weekend time decay gone? The guys over at OptionPit have an interesting article out on the lack of time decay coming out of options on Friday afternoons. It has long been known that market makers have decreased implied volatility in options on Friday to account for the weekend time decay. This has been a common practice for over 2 decades. However recently we’ve seen just the opposite with market makers increasing implied volatility in options on Friday afternoon to account for the “risk” of some macro news breaking over the weekend. Selling vol on Friday afternoon has become a losing trade but just how long will this new trend continue? You can read more at OptionPit.
An alternative road to investing? The team over at OptionsMD just released a solid 3-part video series highlighting a new and different approach to options trading. For those traders looking to grow their trading playbook and/or refine their options trading techniques these videos could be the needed tools to get you over the hump. To view this powerful series simply click on the following link: The New Options Traders Roadmap.
Chart of the Day: Volatility Exchange Traded Products
Today’s chart comes to us courtesy of VIX And More and highlights the landscape of Volatility Exchange Traded Products in graphical form. The chart depicts duration on the X-Axis and leverage on the Y-Axis. Options traders should keep this graphic handy when it comes to understanding the growing list of Volatility ETPs.
Source: Vix And More
Unusual Options Activity
Saw buyers of 30k VIX July 17-19 put spreads for $0.35. This trader appears to be looking for market volatility to remain less than volatile over the next several months.
Courtesy of WhatsTrading.com:
Marvell Tech (MRVL) loses 58 cents to $15.47 on earnings news and one strategist apparently sees the weakness as an opportunity — 5000 Jan 12.5 puts were sold on the chipmaker at $1 to buy 5,000 Jan 17.5 – 22.5 call spreads for $1.05. The three-way traded on ISE, where data confirm puts were sold to buy the call spread, to open. Separately, Mar 16 calls on the stock are seeing active trading. Volume is approaching 10,000, but the action has been in smaller lots. The top trade is 375 for 46 cents when the market was 43 to 48 cents. It’s possible that closing action is driving the flow, as open interest in the Mar 16s is 15,811 and the 2nd biggest position in MRVL behind Mar 17 calls (which have 18,774 in OI). Meanwhile, post-earnings crush is sending levels of implied volatility in MRVL options down 21 percent to 31.5.
Live Nation (LYV) loses 76 cents to $9.74 on disappointing earnings and one strategist sells 11,000 April 10 puts on the stock at 90 cents to buy 20,000 Apr 7.5 puts for 20 cents. The spread appears to roll a position opened 11 days ago when bears were circling LYV and 12,000 April 10 puts traded in smaller lots for 60 and 70 cents. Shares are down 9.5 percent since that time and, while the in-the-money Apr 10s are being closed for a profit, the strategist is opening a new larger position in deeper out-of-the-money Apr 7.5 puts.
