The S&P 500 VIX Short-Term Futures™ Index Excess Return (“the Index”) is designed to reflect the returns that are potentially available through an unleveraged investment in short-term futures contracts on the CBOE Volatility Index®. Specifically, the Index offers exposure to a daily rolling long position in the first and second month VIX Index futures contracts and reflects the implied volatility of the S&P 500 Index, which provides an indication of the pattern of stock price movement in the US equities market, at various points along the volatility forward curve. The Index rolls its exposure to the underlying futures contracts continuously throughout each month, targeting a constant weighted average maturity for the underlying futures contracts of one month.
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Call option bets on the VIX this week soared to a record high 8.4M contracts at the CBOE. "A lot are buying in size," says Mike Palmer, who sits at the center of the VIX pit. With volatility so low, speculators "can get a lot of bang for their buck." About 81% of VIX options trading yesterday was in call options.
After a 7.2% jump Thursday, the VIX is up another 14% today, but - at 15.67 - still well below the 20-year average of 20.50.
The PowerShares Senior Loan Portfolio (BKLN) was honored with the William F. Sharpe Award for ETF Product of the Year this morning.
Since opening in March 2011 and becoming the first floating-rate senior loan ETF, this Invesco (IVZ) fund has amassed over $6.2 billion in assets under management, making it easily the largest player in the space.
"BKLN was a groundbreaking listing for investors seeking to reduce duration in their bond holdings and has become a flagship ETF in this space" stated Gregory Stoeckle, President and Managing Director of Invesco Senior Secured Management, Inc, in a press release.
Also receiving honors this morning is the PowerShares S&P 500 Downside Hedged Portfolio (PHDG), which was named the ETF Innovation of the Year, along with its underlying index: the S&P 500 Dynamic VEQTOR Index.
Higher again today, the Volatility Index has gained for six straight sessions and is now at a 7-week high. Taper fear makes for a good excuse, but Baird's Bruce Bittles says the stock market - after notching its longest string of weekly advances in nearly a decade - simply needs a break.
MKM's Jim Strugger says a number of potential negative catalysts lie ahead - notably Fed meetings in mid-December and late January, the January 1 deadline to sign up for Obamacare, and January 15 end of the current government spending authority (don't forget Friday's employment report).
"If the market was too confident about September tapering six weeks ago, it may be too confident about March tapering now," write the strategists at BAML, suggesting traders position themselves for a big payroll number on Friday - short 10-year Treasurys (TLT), long dollars (UUP), particularly vs. the yen (FXY), and long volatility (VXX).
"The balance of risks going into Friday is unusually asymmetric," writes the team, noting a weak number will be discounted as a temporary shock from the shutdown, but a strong print will have the market pricing in a December or January taper.
Recent buyers of the volatility ETPs are looking smart, with the VXX up 19% in the last 5 days, and the VIIX and VIXY up even more, but that doesn't change the "buyer beware" aspect of these very short-term products, says IndexUniverse analyst Paul Britt. Nice work, he says. Enjoy your profits ... "but this is definitely not the kind of thing you want to leave in your portfolio for a long period of time.”
"We're not trying to kill the Vix," says NationsShares President Scott Nations, whose firm is set to launch what it says is a better way to measure volatility.
The underlying security for the Nations Large Cap VolDex is the SPY vs. the far less liquid SPX options for the Vix. VolDex, says Nations, also strips away deep out-of-the-money options whose prices are easily skewed by traders willing buy lottery tickets, no matter the cost.
It's not the first threat to the cash cow for the CBOE, and the exchange has already criticized the new measure for being too narrowly focused. Nearly 24M Vix futures contracts were traded last year.
The VIX could be coiled for a major spike the next time equities stumble, says SocGen, noting short interest in VIX futures has doubled since the end of June. "The concentrated short in the VIX futures is like a red point if you look at a map of the market, signaling potential risk,” says strategist Ramon Verastegui. A short squeeze in the VIX could spill over, he says, accelerating any downward action in equities.
The last time investors were close to being this short VIX futures was in February, just ahead of a 34% spike late in the month amid the sequester debate and Italian politics.
Oft-burned, investors are quickly jumping right back into volatility futures and ETPs amid the slightest of market wobbles this month. There's been a big jump in open interest in volatility futures at the CBOE, and the "financial wood-chipper" (Brendan Conway's words) known as iPath S&P VIX Short-Term Futures ETN VXX has seen $1.1B of inflows this month. VXX is off 52% this year, better than average for this ETN which has averaged a 65% loss for the last 3 years.
The ProShares Ultra VIX Short-Term Futures ETF (UVXY) has received $497M after falling 80% YTD.
About $580M pulled out of the largest VIX ETF (VXX) since the market began heading down in late March gives strength to the idea the fund is less about speculation, more about hedging. "If history is any guide, a spike in VIX would result in significant redemptions of VIX products," said Barclays' Maneesh Deshpande back in April. Correct.
"Where is the VIX (VXX)," asks Robert Sinn, noting its low level now compared to duplicate crisis moments in 2010 and 2011. Is it because the current jittery state of markets has been so well-telegraphed? Or have markets just gotten so used to bailouts, they're pricing in a central bank floor.
"Fear isn't here," writes Brendan Conway of the VIX, which is up a "scant" 5% amidst a 2% sell-off in equities. Not only is the index not moving much (it rose 50% on August 8, for instance), but traders say volume today, while brisk, is not particularly strong. VXX +5.9%.
The VIX (VXX +6.2%) posts its biggest jump in a month, but isn't anywhere near the sort of level associated with real fear in the market. The index currently resides around 23, but spent most of 2011's late summer and fall north of 30. We may need an S&P drop of 30-35 points in a day for the VIX to crack 30, says Michael Palmer.
"Not scared yet," asks a punter, putting up a chart of the VIX (VXX) going back a few years. The "fear index" has sunk to the level from about where it makes a seemingly annual charge higher - yesterday's big move up hardly registers.
Bill Luby's chart of YTD returns of the various VIX ETPs shows those with dynamic allocations (VQT, XVA) or offsetting long and short volatility legs (XVIX) were able to manage gains in a brutal quarter. Also of interest are the inverse funds, whose gains were greater than the losses suffered by the long funds.
After a decline in volatility to multi-year lows amidst maybe the best Q1 ever for stocks, some traders see Q2 shaping up differently. June 55 calls on the VIX (VXX) traded 30K times early today and June 42.50 calls 15K. With the VIX at $15.23, these bets will pay off only if volatility soars.