Big Printin’ – VIX Rubbed

by riskreversal November 30, 2016 3:45 pm • Big Printin'

Highlighting unusual options activity in VIX options can often times be a useless endeavor as a good bit of the volume tends to be rolls, and often they are traded delta neutral vs VIX futures. Therefore, the flow can be misleading for those attempting to glean some sort of directional bias. I would also add that for the most part calls will usually greatly outnumber puts given the asymmetric nature of the index, as it in often in the lows teens with spikes above 20 and sometimes 30, but It seems like I can count on one hand how many times it actually traded in single digits in my career.

All that said the largest print of the day in VIX options caught my eye and led me to take a quick look at implied movement over the next month.

When the VIX was 12.81 a trader paid 73 cents for 20,000 Dec 21st expiration 16 calls. Assuming they were bought outright with a directional inclination, possibly a hedge into the Dec 14th Fed meeting, they break-even at 16.73 up 30% from the trading level.

The 10% plus drop in the SPX in Q1 produced a +30 VIX. Subsequent spikes in volatility in 2016 have been been less and less, with 2 significant lower lows. 11 seems to be healthy support. Charting the spot VIX isn’t the best use of your technicals, but this gives a good indication of just how that buy the dip in the market has crushed vol, and kept a lid on spikes in vol:

VIX 2yr chart from Bloomberg
VIX 2yr chart from Bloomberg

No that’s the spot VIX, but any trades on options in the VIX is on VIX futures. The VIX futures curve has a fairly healthy slope (17 in Feb) meaning expectations are for higher vol over the next few months versus the very low vol we see now:

VIX futures from Bloomberg
VIX futures from Bloomberg

Obviously the VIX tracks implied volatility on the S&P 500 index (SPX), and this little exercise caused me to price up the implied movement in the SPX between now and Dec 14th on the close, the day of the Fed meeting where it is a near certainty that they will raise interest rates 25 bps for only the second time in 10 years. SPX options are pricing about a 1.75% move in either direction between now and Dec 14th close, and about 2.5% between now and the close of Dec 30th.  That is well above most monthly average implied movements, which makes sense given the recent rally in stocks to all time highs, the upcoming Fed meeting and the uncertainty around the presidential transition. But it also seems kind of fair.

Taking a quick gander at the two year chart of the SPX, it appears to have decent near term support at 2140, at the intersection of the uptrend from the Feb lows and the breakout level from early July:

SPX 1yr chart from Bloomberg
SPX 1yr chart from Bloomberg

That’s the first level to keep an eye on if the Fed spooks the market in any way.