U.S. Market Risk Dashboard Update; No Warning Signs, Yet [Credit Suisse AG – VelocityShares Daily 2x VIX Short Term ETN]

technical bounceJared Woodard: Given the fierce market selloff in recent sessions, I thought it would be helpful to check on our favored set of risk indicators for the U.S. market.

As of the Monday close, VIX is above its two year median level, indicating a stronger bid for short-dated SPX premium. Longer term implied volatility is still well-anchored with SPY one year at the money options priced near the first quartile threshold. The other indicators are not at elevated levels, either: while short term IV momentum has picked up, it is still well within the third quartile, and the realized volatility of one month implied volatility is actually below average.

Rolling three month VXX beta shows that daily changes in the ETP are smaller than we might expect compared to the last couple years of data; however, at -3.8, short term VXX beta is still below the long term average, meaning that traders are buying volatility on the equity dips and selling premium on the rips about as aggressively as we’re used to seeing. If this number were closer to -3, we would take it as a sign of complacency.

Box plots in the chart above mark, in order, the minimum, first quartile, median, third quartile, and maximum two year values for each risk indicator, with the current value shown as a red cross. Indicators are, in descending order, the CBOE Volatility Index (VIX); SPY one year at the money implied volatility; S&P 500 two month IV momentum, measured as the difference between exponentially-weighted 15- and 30-day moving averages of ATM IV; S&P 500 one month volatility of volatility, measured as the two-week standard deviation of daily log changes in 1M IV; SPX SKEW index, provided by the CBOE; and VXX three month rolling beta with SPX as the benchmark.

This article is brought to you courtesy of Jared Woodard From Condor Options.

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