Once again there are really two separate questions
- How low can VIX itself go?
- How low can the VIX ETPs go?
VIX
Since January 2000, the low for VIX was 9.89 and more recently VIX hit 10.98 in June 2014.
That compares with VIX closing at 13.1 on Friday.
Competing pressures on VIX
- I continue to see new inflows into the VIX related ETPs with that putting upward pressure on VIX futures which should add support for VIX
- The Put/Call ratios that I track have seen a decline helping drive VIX lower
- Companies remain a wildcard because in many cases, especially after stocks have increased, they sell puts rather than buy shares outright - a source of declining implied single name volatility
- Events tend to drive volatility higher as it creates the demand for hedging - but even with the probability of a June hike going from 4% to 30% (according to Bloomberg) and a potential for 'Brexit' in June - VIX itself continues to decline
- Seasonality does tend to drag VIX down. Lower volumes and lower investor engagement in the markets tend to decrease implied volatility - (AAII's survey showed 'Neutral' at a 26 year high as one example of this disengagement).
- Realized volatility - is drifting back lower with even the 10 day realized volatility on the S&P 500 back under 11 and heading. Realized volatility was increasing in early May, but as that decreases again, it could put pressure on VIX.
I believe we are getting closer to seeing a bottom in VIX itself, but am concerned that any capitulation out of the VIX related ETPs could give one more big downward push on VIX - possibly taking it back to 10.
Which Brings us to VIX Futures
I continue to harp on the issue that whenever examining UVXY, TVIX, VIX, or similar products the key is to look at the futures, and here there are still signs of further downward pressure.
UVXY with a market capitalization of $859 million holds 61,624 June VIX Futures contracts and 44,863 July VIX futures contracts according to their website. Using CBOE data that represents 26% of the June contract's open interest and 43% of the July contract's open interest.
That seems like a very large percentage of open interest and certainly raises the issue of whether such a large open interest is impacting prices (i.e. is the demand from VIX related ETPs causing the price of VIX futures to be too high?)
Two weeks ago, UX1 (the June contract) was 17.32 and UX2 (the July contract) was 18.95 (a difference of 1.63).
Yesterday they were at 15.375 and 17.625 - a difference of 2.25 - significantly steeper.
Every trading day UVXY will "roll" some of its position from UX1 to UX2.
When the June contract finally expires, that process will begin to roll July into August. The August contract is 18.39 - so much 'flatter' to July than the June/July contract spread.
Can VIX spike dragging all of the futures prices higher and offsetting this drag with some strong returns for the VIX related ETPs like the market experienced last August and this February?
Without a doubt, the answer is a resounding YES, but this has become a very 'crowded' trade and the inflows may be so large relative to the underlying product volumes that it might truly be a case of the tail wagging the dog - impacting prices to the point that the risk reward is not as favorable as conditions might indicate.
So I am closer to believing VIX itself has bottomed, but remain in the camp that a capitulation could occur, inflicting yet more pain on these products - especially as higher beta stocks have been leading the rally recently.
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