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The CBOE: Where fear never sleeps. Beginning June 22, futures action in the VIX will be available nearly around the clock, with trading beginning on Sunday evenings and not shutting down until Miller Time on Fridays.
The calculation of the actual VIX, however, will only take place during regular U.S. trading hours, says the exchange.
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.
Volatility investors may have interest in the little-followed CVOL which actually does a pretty good job of tracking the VIX. Unlike VXX - which tracks front-month futures on the VIX, and is destined to head to zero due to contango - CVOL tracks 3rd and 4th month futures and takes a model-dictated short position in the S&P. It's a nice product, but - for now - high expenses, low AUM, wide spreads and minimal volume likely make it "unownable," writes Oliver Ludwig.
The "fear gauge" is flawed, says Citi's Mike Pringle, and investors risk harm by using the VIX (VXX) as an indicator of market risk. "It's an asset class and it's more traded for yield than protection," he says, noting the growth of structured products based on the VIX as dampening reported volatility. "It's still relevant in extremes, but not in a normal functioning market."
The VIX started showing signs of life this week, a development that historically doesn’t bode well for stocks. The so-called fear index closed above 20 Thursday for the first time this year before pulling back a bit yesterday. The odds of a market rally over a three-, six- and 12-month time horizon are at their lowest when the VIX is 20-25, according to Citigroup data that goes back to 1990.
Bets against higher volatility (and there are a ton of them) get fried, with the VIX up 23% and hitting a new YTD high. The level of shorts in some VIX ETPs is eye-popping, with 273% of the share count of the Ultra VIX Short-Term Futures ETF (UVXY +20.9%) out on loan, reports Ned Davis. Of the unleveraged products, 75% of the Short-Term Futures ETN (VXX +10.4%) is on borrow, and 110% of the S&P Dynamic VIX ETN (VXZ +4.3%). "This is one of those trades that works remarkably well until it doesn't," writes Brendan Conway. Indeed.
Major hedge funds have suddenly turned bullish, reportedly buying massive amounts of OTC call options on the S&P 500 (SPY). The purchases have been large enough to send the VIX (VXX) higher even as stocks continue to gain. An important milestone - the implied volatility of S&P calls is now greater than that of puts, a true rarity since 2007.
The VIX (VXX +0.6%) - typically moving the opposite direction of stock prices - has been more correlated to equities this year than any other time since 1996, according to Kaitlyn Kiernan, with today (if it holds) being the 23rd instance YTD in which both have moved in the same direction. That translates into 25% of the trading sessions (for all 1996, it was 29%).