It was quite the flight to options on Thursday: a record 36.1 million contracts traded, according to OCC PR Director/Black Hawks nut Jim Binder. How huge was that? It trumped the previous mark set on May 6th, 2010 (the Flash Crash) by a whopping 17%, and it doubled the average daily volume in 2011.
And of course, everybody wanted to own everything. The options volatility index (VIX) exploded up 35% to a new 52-week high. The iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) shot up 20% on volume of over 95 million, vs. the previous record of 60 million set in March.
You don’t need me to tell you that these are all beyond extreme readings. But I’ll tell you anyway: These numbers are all off the charts.
There was lots of fear (presumably) about the jobs report, which came in relatively tame. But of course you don’t see the VIX up 35% on worries that a widely variable and adjusted and ultimately revised number will print on one side of the margin of error or the other. So clearly we will not just click right back to business as usual by lunchtime (On Friday, amid a whipsaw early market, the VIX was up another 1.6%).
The VIX futures curve has gone into “backwardation.” That means that the further you go out in time, the cheaper the future — at least for the first few cycles, it gets pretty flat after that. August closed at a 4-point discount to “cash”, September closed 1 1/2 under August.
In other words, the market considers this VIX pop somewhat of a blip, which you would always expect. There’s just no way assumptions of future VIX will soar into the 30’s overnight. August futures expire in a week and half, and 27.5 is a very high number, even if it doesn’t quite match the VIX you see on the board.
Backwardation does benefit VXX. Remember: it has to roll out in time in order to maintain a constant 30-day duration. In English, that means selling the equivalent of August futures and buying now-cheaper September futures. So yeah, VXX won’t dribble away a little money each day. But buyer beware: you are obviously buying a volatility ETF after a huge move.
Emotions have hit an extreme. Crashes happen off deeply oversold levels. Crashes are also an incredibly low-probability event, especially when everyone has it on their radar. No one knows what’s up next, but what we can see pretty certainly is that volatility won’t collapse in the next few hours, especially with fears of weekend news up next.