Dow 15k and VIX Low, But Not That Low

Wednesday, 8 May 2013

S&P500 and Dow Jones above Round Number Levels

After four bullish days in a row both S&P500 and the Dow have now closed above the round number levels of 1600 and 15000, respectively. The Dow was struggling a bit on Monday (15000 seems to be a bigger thing that 1600), but rallied above the level decisively yesterday. So now we have both the indices at all-time highs with the earnings season (strong on the bottom line and rather questionable on the top line) about to end. The macro calendar is much lighter this week compared to the previous one.

S&P500 Dow Jones Industrial Average

VIX Low, But Not That Low

The VIX has been between 12.50 and 13.20 during the last 3 trading days, after having fallen there from the 14’s last Thursday. It is now lowest since 12 April, but still well above its 2013 lows (11.30 on 14 and 15 March).

Some people may be surprised that the VIX is not making new lows when the equity indices are making new all-time highs. Keep in mind that while the VIX and S&P500 tend to move in opposite directions, it does not mean they are mirror images of one another. Although they are closely related, they in fact measure different things (stock prices vs. option prices). Moreover, while the equity indices are unlimited on the upside (S&P500 can theoretically rise to 2,000, 20,000, or even millions), the VIX is limited on the downside (theoretically by zero and historically somewhere around 9).

VIX (CBOE Volatility Index)

VXV near 2013 Lows

The VXV index, the 3-month version of VIX, is now in low 14’s. 14 has been the low on numerous occasions in the last months (ignore the dip on 28 March).


VIX Futures

VIX futures curve moved downwards in line with the developments in stocks and spot VIX. The extent of the week-to-week change was almost the same along the whole curve, between 0.40 and 0.60 points.

Although the contango of course remains, the steepness of the curve is rather moderate, especially when you exclude the nearest expiration months. The difference between July (15.75) and November (17.60) is less than 2 points. This may be favourable for those willing to bet on longer term volatility using some of the exchange traded products tracking the S&P 500 VIX Mid-Term Futures Index (that includes the 4th through 7th month), such as VXZ or VIXM.

VIX futures curve

The front month, which expires in two weeks, has dropped below 14 for the first time since it started trading. It is now at about 1 point premium to the spot.

VIX May 2013 futures

2-Month Low in VVIX

The VVIX index, which measures implied volatility of VIX options in the same way as the VIX measures implied volatility of S&P500 options, fell below 79, lowest since 12 March. It still remains well above its lows from January and February.