Article / 29 August 2016 at 14:45 GMT

Volatility Update: VIX in the doldrums

Product Manager, Options Trader, Educator
  • Fed turns hawkish after months of doubt
  • VIX index remains sedate below resistance
  • Price action may stay restrained ahead of NFP print

The Fed may have turned the corner on rate hikes, but the volatility index 
is maintaining a slow burn ahead of Friday's US jobs release. Photo: iStock

By Georgio Stoev

The dog days in the market may be over as the Federal Reserve has now indicated that the case for a rate hike is on the table. 

The language of Fed chair Janet Yellen's speech last Friday was closely followed by investors, and provided for some fireworks as the market rallied in the early session only to reverse when Yellen spoke. 

Let's review how different asset classes performed for the week ending August 26...

Aug 22-26

Source: Saxo Bank

While the large caps led by the S&P 500 fell some 0.5%, the broad index (IWM) held its ground virtually unchanged for the week. 

Crude oil for October delivery (CLV6), took a breather after a strong three-week run in which it gained 15%. The interest-sensitive TLT also came under pressure as investors are starting to get nervous about holding long-term paper. 

The volatility index

The CBOE VIX index – the nervous system of the equities market – seems to want to break out. On Friday, the VIX attempted a breakout above its July 8 level of $14.75, but failed to take out resistance. 

VIX Daily

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Source: Saxo Bank

We might be in for another week of sedated price action as traders will focus on the monthly labour report from the US due Friday. 

Historically (over the past 20 years), the VIX has gained about 12% in the months of September and October. Volatility has not ordinarily been pronounced in election years with the exception being the financial crisis in  2008 when volatility index climbed some 145%. 

For now, we favour long volatility like calendar and diagonal spreads which although complex to manage, feature defined risk and cost little to get into. 

We will revisit these strategies in an upcoming OptionsLab

Have a great trading week ahead!

— Edited by Michael McKenna

Georgio Stoev is futures and options product manager at Saxo Bank 
Market Predator Market Predator
Nice summary Georgio. No doubt Wk35 is about fridays NFP.


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