The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) fell again today, plunging 4.21 percent to 12.98 and resulting in a decline in major financial products tracking it. The iPath S&P 500 VIX Short-Term Futures ETN ($VXX) was off over 2.25 percent, and the ProShares VIX Short-Term Futures ETF ($VIXY) dropped over 2 percent.
Volatility Low After Big Year
The VIX averaged just 14.2 a day for 2013, which represented an expected annualized rate of change for the S&P 500 of 14.2 percent as judged by the size of options contracts being written. This represents the lowest annual average since 2006, and today’s decline has pushed it even lower. It remains well below the historic mean of 20.20, and finished below that level on every day of 2013 save two.
Coming off a year where the S&P gained nearly 30 percent, it appears as though equities investors are anticipating little volatility. Now, anticipated volatility is low across the board, with indices tracking 29 different classes of assets including U.S. equities, treasury notes, interest rates, and currencies showing record lows for data that goes back to 2002.
“This volatility collapse is concerning,” said managing director and derivatives strategist with MKM Partners Jim Strugger in a Bloomberg article. “U.S. equities are losing any semblance of risk.”
The VXX and VIXY both declined over 60 percent in the last year.
Market Run Promoting Risk-On Investing
Despite the fact that the VIX measures anticipated change either up or down by options traders, it is commonly perceived as a perception of how much risk is in the market. And the stimulative quantitative easing policies from the U.S. Federal Reserve appear to have helped keep it at low levels throughout 2013.
“Accommodative central bank policies have helped create a risk-on mentality, not just in equities but in global volatility in general across multiple asset classes,” said Eric Metz, a derivatives strategist and fund manager at RiverNorth Capital Management LLC, to Bloomberg in a phone interview. “The question for 2014 is whether tapering will spur a rebound in volatility.”
Heavy Volume Despite Decline
While the low volatility has pushed down those ETFs and ETNs following the VIX, many of those same products are trading at very high volume. The VXX has an average daily volume approaching 20 million shares.
And 2013 proved to be the highest-volume year on record for the VIX, according to a press release from the CBOE last Thursday. The CBOE tracked some 40.2 million options contracts traded on the CBOE Futures Exchange (CFE) in 2013, representing a new annual record for the fourth consecutive year and a 67 percent increase from 2012.
There were also 39.9 million futures contracts on the VIX traded on the CFE, also representing an annual record for the fourth-straight year. It represented a 68 percent increase in volume from 2012.
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