The CBOE Volatility Index dropped below 16 this week for the first time since April. The VIX continues to stagger but could be displaying very attractive valuations in terms of the options versus “realized volatilities.”
Not surprisingly, during Wednesday’s trading session, we observed some “nibbling” in not only VIX calls, but also in VIX related “long” ETNs including iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and ProShares Ultra VIX Short Term Futures ETF (NYSEArca: UVXY).
Thus, it may be particularly surprising to some that even though equity indices closed at or near their daily highs yesterday, VIX related ETPs also closed near their highs.
Our market technician David Chojnacki does note technical resistance near the 1375 level in the SPX (S&P 500 Index) as well, so we would expect some congestion near term around this level and perhaps some profit taking, or participants establishing new equity shorts.
Yesterday, the “long” VIX ETNs expressed “backwardation” for the first time in some time versus the VIX index itself, which tends to be “good” for holders of long VIX products when it exists.
As most in the industry know, “long” VIX ETPs have historically spent most of their time in “contango” which means that distant VIX futures contracts are priced higher than spot or near term VIX futures contracts, which means that when long VIX ETPs rebalance according to their monthly “roll,” the funds actually lock in losses in these states of contango, which hampers long term performance results. [Top ETF Wealth Destroyers]
Backwardation however, is the opposite effect as contango, and as long as it exists, upon the rebalance in long VIX products, the funds actually lock in “gains,” and can actually “outperform” spot VIX (i.e. yesterday the VIX itself was down 1.94% versus VXX for instance up 1.18%).
The VIX Index itself has now spent 16 consecutive trading sessions below its 50 day moving average, and incredibly was around these levels this time last year, before sharply rising as high as $48 by August. [Volatility ETFs Slip as Fear Recedes]
Being that there is not a portfolio manager in the ETF space out there that fails to remember last August through October’s momentous decline and volatility shock that occurred, we would not be surprised to see some upside action in the VIX (and reciprocal action in VIX related ETPs) in the short term as the month of August approaches.
Clearly, a “risk on” appetite does seem to exist among institutional managers toward equities right now, with indices challenging recent highs, but the appeal to simply “hedge” or “lock in gains” at current levels may very well be there for some, especially those whom are consciously and closely monitoring developments and signals coming from the VIX itself.
iPath S&P 500 VIX Short Term Futures ETN
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