$VIX Futures Snapshot – VIX Higher with SPX Higher

by Enis May 15, 2013 1:54 pm • Commentary

I’ve received many questions in the past 24 hours about why the VIX is going up even as the SPX index continues to make new all-time highs.  Here is what I wrote last month in my VIX trade post about volatility on assets making new all-time highs:

With the SPX index making all-time highs, VIX spot has moved back to near the 12 level.  However, a new all-time high can sometimes be a reason for increased volatility rather than just decreased volatility,a case we laid out for our IBM trade idea last month.  In that post, Enis said:

When stocks make new breakouts like this, options oftentimes get bid up as traders prefer to own options to play for a fast move on the breakout rather than buy stock and risk a false breakout scenario.  In that sense, IBM’s breakout to new all-time highs presents a likely either/or scenario.  EITHER IBM’s breakout holds and the stock continues its march higher like the previous instances in the past 3 years.  OR IBM’s breakout today is a false breakout, and IBM breaks back below the prior 212 resistance level, faking out all the new buyers who bought the breakout today.

In either case, this type of setup is conducive to a fast move in either direction.  It’s rare that IBM’s stock just sits right above the breakout level.  So are option prices expensive as a result?

The same holds true of the SPX index today.  Even if the breakout continues, we expect that there will be a sharp selloff at some point in the next couple months simply because the steepness of the ascent signals a more emotional rally.  With the VIX at 12, near the lows of the year, the entry for a long VIX related trade is decent:

Sure enough, new all-time highs in the SPX index have resulted in an almost 100 point move higher since that breakout.  The move’s velocity has picked up in the last week, which is causing volatility traders to re-assess the low pricing of options.  Buyers of protection are also likely getting more aggressive as prices advance so aggressively.

To get a sense of how the VIX futures have moved, here is last week’s snapshot:

VIX Snapshot 050813, Courtesy of Bloomberg
VIX Snapshot 050813, Courtesy of Bloomberg

Compare that to today’s snapshot:

VIX Snapshot 051513, Courtesy of Bloomberg
VIX Snapshot 051513, Courtesy of Bloomberg

So VIX spot is higher, and the May VIX future is the only futures contract that is lower.  All of the other futures are higher in the past week, despite the 40 point move higher in the SPX index since last Wednesday.

I expect the VIX to remain elevated from here whether the SPX continues higher or corrects lower.  To me, the low probability event is for the market to consolidate around here in a tight range for the next few weeks, which is what is implied by a VIX at 13.  We are in uncharted territory for the SPX index, and I expect option prices to rise in anticipation of more large moves.