Placid VIX Tells Little of Volatility Story as Futures Climb

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  • VIX investors see measure climbing 40% in six months to 20.5
  • “We have a residual hangover” from start of year, trader says

Only going by the Chicago Board Options Exchange Volatility Index, you might conclude there isn’t a drop of anxiety running through the blood of U.S. stock traders. A closer look shows that isn’t true.

Even as the VIX sits 25 percent below its bull market average, investors are using futures on the index to hedge against trouble in equities six months from now. They’ve bid up November contracts on the so-called fear gauge to 20.5, sending prices to the biggest premium in almost three years versus expected volatility in the SPDR S&P 500 ETF over the same period.

Scarred by the S&P 500’s early year fake-out, in which a 11-percent tumble was wiped out in a matter of weeks, investors are taking steps to hedge. The U.S. presidential election, the looming Brexit referendum, and uncertainty surrounding the next Federal Reserve rate hike are all apt to move markets in late 2016, said Mark Sebastian of Option Pit.

The risks are “going to combine to keep volatility more elevated,” said Sebastian, trader and founder of Option Pit, a Chicago-based education and consulting firm. “We have a residual hangover from what happened at the beginning of the year, and that’s affecting positioning six months from now.”

Climbing to 20.5 would mark a drastic change for VIX. It closed yesterday at 14.68 and has been trading below 20 -- a key level watched by investors and traders -- for 54 days, the longest streak in over a year. Investors, who fled to cash after the selloff that started the year, were caught wrongfooted by the sudden rebound from Feb. 11. Now they’re using the VIX to hedge rather than abandoning equities, according to Sebastian. The benchmark volatility gauge rose 3.8 percent to 15.25 at 10:12 a.m. in New York.

The U.S. stock market presents a hodgepodge of ways of tracking volatility expectations, among them the absolute level of the VIX, futures on the index that trade at the CBOE Futures Exchange in Chicago, options on benchmark indexes such as the S&P 500, and contracts that are tied to exchange-traded funds.

A widening gap between six-month VIX futures and the S&P 500 ETF is a sign of concern coalescing around November, according to Dominic Salvino of Group One Trading LP. While options on the fund tend to reflect sentiment expectations over the full life of the contract, VIX futures are bets on where volatility will be at expiration.

“The VIX doesn’t care what happens until the last month,” said Salvino, a specialist on the CBOE floor for Group One Trading, a market maker for VIX options. VIX futures that expire in November were 5.6 points more expensive than contracts gauging six-month implied volatility for the S&P 500 ETF on April 22, the widest spread since July 2013.

Other corners of the market show expectations for volatility that aren’t reflected in the VIX. One is exchange-traded notes tied to the VIX, where options traders have positioned themselves for declines in the S&P 500. Over the last 12 weeks, investors have sent an unprecedented $3.5 billion into securities that reap gains from wider price swings.