If you’ve watched the CBOE Volatility Index (CBOE: VIX) lately, you’ve probably noticed a bit of a churn. Options trading investors have noticed that since VIX first spiked up into the 20′s on February 22nd, it has more or less printed in a range from the high teens to low 20′s.
But it’s not nearly as peaceful as it sounds. Check out the graph here on the 10-day historical volatility of VIX over the past year. Yes, the concept of volatility of volatility should make your head explode. But think of VIX as a stock for a quick moment. This chart shows the volatility on that VIX stock. And as you can see, quite the spike lately on the 10-day. In fact, this is as fast as VIX has moved since last June.
Similar story for the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX). Here’s the 10-day historic volatility going back one year.
Here’s where it gets either more interesting or more confusing. Options on both VIX and VXX have not seen a commensurate spike in volatility. Yes, I refer to volatility on a volatility index (VIX) and volatility on an ETN that tracks a volatility index (VXX). VXX only started listing options last June, so there’s not much history to go on. But with normalized 30-day options trading at a low 60′s volatility, we can say that they sit very near all time lows. And they also trade considerably lower than the volatility at which VXX is moving right now.
What’s it all mean in English?
VIX and VXX are both flipping around at a rapid pace lately, albeit within a contained range. Options on VIX and VXX do not expect this pace to continue. If you believe that’s wrong, it’s not a bad time to use long options in either VIX or VXX for a directional play.
Follow Adam Warner on Twitter @agwarner.