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What on earth is going on with the Vix?
Dedicated Vix watchers at the Daily Options Report and Vix and More blogs are getting a little agitated.
It’s all down to the Vix futures contango, which has sharply steepened recently. More curiously still, it is running a particularly high premium for the month October.
As the DOR noted on Tuesday (emphasis ours):
October is roughly 3 month’s (and change) away, and the VIX futures are roughly $8 Nov even higher than that.
Pretty clearly Mr. Market expects a volatility pause this summer, followed by a return to Excitement this Fall. That’s normally a safe assumption as summer is the lowest vol. time of year.
What stands out now though are two things. One is the magnitude of the expected volatility pop. 3-4 points I could easily see. But 8 points?That’s some serious Fear.
But that’s not all. According to DOR the Vix itself is already running modestly high by trading at the 25.80 mark. For the market to expect it to hit the low 30s in October is therefore quite significant.
To compare, the index hit 56.32 back in October 2008.
Looking at the most recent futures curve, meanwhile, you can definitely see a pronounced bump around October:
But just to highlight the level of the steepening, here’s a chart from Vix and More of the historical difference between the VIX third month futures and front month futures going back about six months.
It really does shoot higher:
Although, with that in mind, we would like to add some more charts to the mix of our own. These in our opinion suggest there might be more to this October premium than just a simple fundamental volatitilty view.
First here’s a chart showing quite a significant build up in short interest in the VXX (the iShares Vix based ETN) from about February onwards:
And another showing the general volume explosion in the same period (against a mostly falling share price):
Curiously, there was an equal volume explosion in iPath’s mid-term ETN the VXZ (which sits further down the curve from the fourth (October) month onwards) around the same period — although with a significantly larger price gain:
And lastly Barclays’ own data regarding AUM and liquidity regarding the two funds (found in an SEC filing, rather than on the ETN’s actual home page):
We can’t think the last time all those trends came together in an exchange traded product and underlying future.
Oh, apart from the time both the USO and UNG exchange-traded commodity funds saw assets under management spike, short interest surge and contango in the underlying jump — all against a largely static or falling price.
As for NAV/price deviations… Here’s the VXX deviation getting larger of late (courtesy of Morningstar):
And one last curiosity: why would the short-term VIX ETF (VXX) see no price anomaly during May 6 ‘flash crash’ day (first chart) but the VXZ see quite a substantial one (second chart)?
Answers on a postcard to FT Alphaville please (or in comments below).
Although, our hunch is that the VXX and VXZ are the latest funds to attract some sort of high frequency based contango-spread arbitrage trade.
Related links:
A GLD contango strategy – FT Alphaville
The problem with commodity ETFs – FT Alphaville
A self propelled pyramid? -FT Alphaville
How contango affects oil ETFs – FT Alphaville
This entry was posted by Izabella Kaminska on Wednesday, July 14th, 2010 at 11:38 and is filed under Capital markets, Commodities. Tagged with exchange traded notes, vix, volatility, VXX.
