Inside Volatility Trading: July 10, 2019

Insights with Kevin Davitt

Cboe's VVIX^SM Index,which is an indicator of the expected volatility of the 30-day forward price of the Cboe Volatility Index (the VIX® Index), has garnered considerable attention in recent days. On Tuesday, July 2, the implied volatility of VIX options as measured by the VVIX fell below 76 for the first time since late February of 2019.

For those unfamiliar, the VIX Index uses strips of S&P 500® Index (SPX) options to calculate a dynamic forward-looking estimate of equity volatility. The VVIX uses strips of VIX options to estimate future (30-day) volatility of the VIX Index. Neither the VIX Index, nor the VVIX are tradable, but both measures are meaningful for a wide variety of market participants.

The VVIX tends to vacillate between 85 and 110. Over the past 52 weeks, there has only been one VVIX close below 75 (February 22, 2019). If we look back five years, there have only been 15 VVIX closes below 75, which works out to 1.18% of the time. In short, it's unusual and 'vol of vol' appears low.

VIX options are tradable and a VVIX measurement at the low end of its five-year range arguably means that VIX options are relatively cheap. June and early July of 2014 marked VVIX lows in recent years. On July 24, 2014, the SPX began a 4.3% peak-to-trough decline over the course of two weeks. More contemporaneously, following the relatively low VVIX reading in late February of 2019, the SPX slumped by 3.4% between March 4 and March 8.

While past performance is never an indication of future results, the confluence of a relatively low VIX Index and VVIX may be attractive to some VIX options traders. If one anticipates a higher VIX Index/VIX futures in the coming weeks, VIX options calls and/or call spreads could be compelling. In the current environment, long VIX options (debit strategies) may have a better risk-reward relationship than they have historically. In fairness, 20-day historical volatility in SPX is running just above 8%.

Big U.S. banks will begin reporting quarterly earnings next week with JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), and Goldman Sachs Group Inc. (GS) set to release next Tuesday (July 16). Standard July VIX futures and options expire on July 17.

The next FOMC meeting will take place on July 30 and 31 with the market pricing in a significant likelihood of a 25 basis point cut. The odds of a 50 basis point reduction in Fed Funds fell dramatically following the strong employment data last Friday.

For more information:

VOLATILITY NEWS

NOTABLE TRADES

Video: Choppy market trading water ahead of Powell testimony. $VIX term structure still in contango.

EVENTS

Cboe Will Be Exhibiting:
July 22-24, Opal Public Funds Summit Eastin Newport, RI
Cboe Will Be Attending:
July 22-24, Opal Public Funds Summit Eastin Newport, RI
July 31, FIA Annual Summer Outingin Chicago, IL

About the Contributor

Kevin Davitt heads Cboe's educational efforts, serving as an in-house expert on volatility, options and the markets. Davitt has provided commentary for Bloomberg, Reuters, Barchart, Inside Futures and other market-focused media organizations. As a market maker, Davitt specialized in Russell Index products and commodity trading, working with both retail and institutional clients.

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To learn more about the VIX Index, visit www.cboe.com/vix