The S&P 500 Index ($SPX) and NASDAQ ($NDX; QQQ; $COMPQ) were having one big party, with new intraday and/or closing highs having been registered for 11 of 12 days ($SPX) and 13 in a row ($NDX). That party came to a swift end yesterday, Thursday, September 3rd. But has the party really ended, or is this just a pause? $SPX did not even quite pull back to its rising 20-day moving average.
This article was originally published in The Option Strategist Newsletter Volume 18, No. 12 on June 25, 2009.
Recently, the CBOE’s Volatility Index ($VIX) has been trading at substantially higher levels than the 20-day historical volatility of the S&P 500 Index ($SPX). While it’s somewhat normal for $VIX to trade higher than historical volatility, the recent differential (over 10 points on some days) has been large enough to raise eyebrows among those who follow these things – e.g., us! In this article, we’ll examine the relationship between $VIX (implied volatility of $SPX options) and historical volatility of the $SPX Index itself.
A week ago, $SPX was struggling to break through the old highs just below 3400. That is no longer the case, as the Index made a strong move upward this week, allaying any fears of a double top and punishing the shorts once again.
The S&P 500 Index ($SPX) finally made a new all-time closing high this week, both intraday (Aug 18th and 19th) and closing (Aug 18th). This was cause for selling in some circles. As we've noted before, this is understandable in terms of the investor who says "Whew! I'm finally back to even," and sells. We have seen these little resistance areas since mid-May, and each time $SPX has been able to overcome them and move to new highs.
This article was originally published in The Option Strategist Newsletter Volume 21, No. 20 on October 26, 2012.
I’m always a bit dubious of analyses of how a particular indicator or market behaves in an election year. First of all, you have to throw out 75% of your results, which automatically reduces the reliability of the data. However, there are some patterns that seem to be significant, so let’s look at some of these.
The CBOE has listed mini volatility futures, trading with the base symbol VXM. These are worth $100 per point of movement, as opposed to the $1,000 per point of movement on the “big” volatility futures contract. Everything else is the same between the mini and the full contracts: expiration date, settlement pricing, etc. So far, only the first four months have mini contracts, while there are “big” volatility futures for nine months out. In hedged strategies, these can now be paired with the micro e-mini S&P futures (worth $5 per point of movement). This will allow smaller accounts to take advantage of some of the more sophisticated strategies. Volume in the mini volatility futures has been mostly in the front month, but the markets are tight (5 cents wide) so they are a viable trading tool at this time.
At the current time, realized volatility is dropping, $VIX is dropping more slowly, and $VIX futures are remaining at fairly lofty levels because of the uncertainty surrounding the upcoming Presidential Election. So, we decided to take a look back and see if there had been any other times when there was such a large discrepancy between the near-term $VIX futures and historical volatility. It turns out there was only one other time when the premium differential was larger – in late January, 2009. However, it doesn’t seem that there is any market-predicting parallel here.