While last week's relentless panic buying [13]has been extensively commented on, it was last week's nearly 50% plunge in near-term stock vol that the major news as the world went from risk off mode to risk on. It wasn't just stocks whose volatility imploded: as the following charts from Bank of America and associated commentary show, it was the implied near-term volatility of all asset classes that was hammered in the past three days.
First equities:
[14]
Chart of the week: VXV/VIX ratio says risk rally to continue
While the VIX index has just reached fresh 2m lows, it still has plenty of room to fall; particularly against its curve. Indeed, the VXV/VIX ratio (VXV is the Bloomberg ticker for 3m S&P500 Volatility) continues to trend higher. Until this ratio reaches 1.2 or greater (indicating investor complacency) the US equity rally remains on firm footing.
But also Treasurys:
[15]
US Fixed Income volatility breakdown
The MOVE index has broken its yearlong pivot at 73.00 and completed a 3m top in the process. Expect Treasury volatility to decline further in the weeks ahead towards the May lows at 48.87 before greater signs of basing emerge.
FX...
[16]
FX volatility descent accelerates
G7 FX volatility remains under pressure. The mid-September completion of a 7m Head and Shoulders Top says that the fall in volatility can extend to the Dec’12 lows at 7.06% before all is said and done.
And Crude:
[17]
Oil volatility spills lower
After 6m of a very choppy consolidation, WTI Crude Oil volatility has broken sharply lower to resume its year and a half downtrend. The completed Triangle formation points to further downside in the weeks ahead. The initial target is the Mar-28 low at 17.60, with risk for a move to its long term channel base near 13.53.
Finally, while everyone is fascinated by the rapid VIX down move, it is what someone did on Friday by betting that VIX will double by February in a 24/29 VIX Call Spread, that was of note. The amount wagered: $6.7 million. Whether or not this was an outright trade, or a hedge (and if one listens to Jamie Dimon perjuring himself to Congress, any trade is a hedge, adding further to the confusion) is unknown, but it is not pocket change betting that the plunge in vol will be merely transitory. From Bloomberg [18]:
An investor paid $6.7 million for a trade that will pay off if the Chicago Board Options Exchange Volatility Index more than doubles by February.
The trader today bought 160,000 bullish contracts on the VIX expiring in February with a strike price of 24, while selling the same number of February 29 calls in a strategy known as a call spread, according to New York-based Trade Alert LLC. The trade profits if the volatility gauge rises above 24.42 from the current level around 13, data compiled by Bloomberg show. It has a maximum payoff if the VIX jumps 115 percent to 29.
“This is probably an investor with a portfolio of stocks who is using the VIX to hedge against an increase in market volatility,” Frederic Ruffy, a Chicago-based senior options strategist at Trade Alert, said in a phone interview. “The focus is on the February options, so it expresses concern over what will happen during the next three months, which coincides with the next deadlines on the government budget.”
Congress resolved a deadlock on funding the U.S. government and avoiding a default this week, driving the VIX down from a three-month high of 20.34 on Oct. 8. The agreement funds the federal government through mid-January and lifts the nation’s debt ceiling until Feb. 7.
The VIX, which hasn’t closed above 29 since the end of 2011, slumped 3.3 percent to 13.04 today, a one-month low.
The purchased February 24 calls cost 90 cents per contract, while the February 29 calls were sold at 48 cents. The total cost of the trade was 42 cents per contract, or $6.7 million, according to data compiled by Bloomberg.
So with the latest can-kicking set to expire in less than three months, and at least one investor already putting in millions in a wager that Vol, currently plunging, will once again double as the Congressional dysfunction returns, one wonders: Will Mr. Chairman, who runs the world's biggest hedge fund, get to work as usual, and make sure any and all risk hedges expire worthless, as the New Normal continues to be defined by Return, and zero Risk?