This week, the four major equity indexes as well as their associated implied volatility indexes all closed up on the week. That has only happened five times before since the inception of the CBOE volatility indexes.
While the intuitive assumption might be that a widespread increase in implied volatility should be bearish from a contrarian standpoint, on those five prior occasions average results over the near term have actually been positive. Full details are available in a separate post on the website.
I won’t rehearse the set of negative readings that have been steadily ignored over the past several weeks, but I will note that the VIX Premium Ratio [see chart 8] has partially worked off its extreme condition.
Oil has traded in a range between roughly $55 -$73/bbl since May, [see chart 14] and as implied and realized volatility tick up from their June lows [see chart 17], I will be watching to see whether crude encounters substantial resistance in the late June/early July $70 area.
The technical price picture isn’t reflected as clearly in USO, the oil ETF. Since realized and lagged implied volatility are relatively in sync [see chart 16], I don’t see any edge in oil options at this time.
- Comment. Highlights items of note in the data below along with our short-term volatility bias and any trading theses. The Expected Daily Move table displays the de-annualized price and percentage change in each underlying asset as implied by its volatility index, within one standard deviation. The Forward Bias table displays my bias for the movement of the price and implied volatility of several assets for the coming week.
- Weekly Change. Tracks the weekly percentage change in the assets listed and in their implied volatility indexes.
- Implied Volatility Indexes. A one year chart of the implied volatility indexes for the S&P 500, gold, oil, and USD/EUR. Indexes for the Nasdaq 100 and Russell 2000 are omitted because of their tight correlation with VIX.
- S&P 500 Price and Bollinger Bands. Tracks daily closing prices in SPX with an overlay of one and two standard deviation 50-day bands.
- S&P 500 Implied and Realized Volatility. Tracks the 21-, 60-, and 90-day realized (or “historical”) volatility of the index and the 21-day lagged CBOE Implied Volatility Index (”VIX”). Realized volatility is displayed as the annualized standard deviation of lognormal returns over the period specified, and may be thought of as a backward-looking measurement of price behavior. Implied volatility is the annualized standard deviation of returns implied by option prices, and may be thought of as a forward-looking measurement of expected price behavior.
- S&P 500 Implied/Realized Volatility Ratio. Tracks the ratio of 21-day lagged implied volatility (IV) to 21-day realized volatility (RV). This ratio asks how well IV from one month ago predicted the RV over the next 21 trading days (roughly, 30 calendar days). When IV correctly anticipates RV over the period, the ratio will hover near 1; we regard the area near 0.9 – 1.2 as normal, given the persistence of a volatility risk premium in equity market derivatives. A ratio less (greater) than 1 indicates that the price behavior of the underlying asset was more (less) volatile than anticipated.
- Volatility Futures Term Structure. Tracks the Friday closing prices of the Volatility Futures complex (VIX, VXD, RVX) for the two weeks prior, along with the spot levels for reference.
- VIX Premium Ratio. Tracks the ratio of rolling three-month (VXV) to one-month (VIX) implied volatility. Periods in which one-month readings persist at an extreme premium or discount to three-month levels have tended to coincide with major market moves.
- S&P 500 Daily Return Distribution (3 month). Histogram plotting the frequency of daily percentage returns over the prior 63 trading days.
- Implied Correlation Index. Reflects the market-capitalization weighted average correlation of the 50 largest components of the S&P 500.
- Gold Price and Bollinger Bands. Tracks daily closing prices in GLD with an overlay of one and two standard deviation 50-day bands.
- Gold Implied and Realized Volatility. Tracks the 21-, 60-, and 90-day realized (or “historical”) volatility of the ETF and the 21-day lagged CBOE Gold Volatility Index (”GVZ”).
- Gold Implied/Realized Volatility Ratio. See #6 above; given the novelty of the VIX-style gold volatility index (GVZ) and the characteristics of the underlying, we do not yet have a range we regard as normal.
- Gold Daily Return Distribution (3 month). See #9 above.
- 15-18. Oil charts correspond to 11-14 above.
Disclosure: No positions