Daily Options Report

So with a holiday fast approaching, one could reasonably expect some divergence between VIX and VXX. After all VIX estimates volatility on the SPX options board, and when holiday's approach, traders lower bids to account for the slow stretch of time ahead. And that has the effect of lowering volatility in the calculation.

VXX on the other hand is an ETN that tracks a VIX future with a perpetual 30 days until expiraiton. A holiday in a few days means nothing as all this measures is a snapshot VIX reading 30 days from now. In other words, it's a Flashforward to what a trader 30 days from now will anticipate in realized volatllity 30 days ahead from there (in other words, January cycle volatility).

We would thus expect to see VIX trail VXX, but in fact if anything it's going the other way. VXX hovers near it's lows (they're all-time lows, but remember this product is not even 10 month's old yet). VIX isn't exactly flying here, but it's modestly off the 52 lows and really hasn't moved much since mid-September, whereas VXX has dropped significantly.

Now we know VXX has some tracking issues. They must constantly roll out VIX futures (or swaps) and when VIX futures are in contango that's a small money-loser each time that must add up. We also know futures premiums have contracted in the VIX as traders begin to realize this IS the mean of the VIX, and 2008 is the outlier.

But even given all that, right here right now VIX should underperform VXX, and it's not. What gives?

Well one explanation is that if we look 30 days from now it's slow holiday week ahead then too. Perhaps it's that both products have slow stretches on their minds, just different one's? No way to really know as like we said, VXX didn't exist this time last year.

Another explanation is that longer term volatility assumptions just keep eroding. You can call that complacent or just call that the reality of a slow moving market. Selloffs are shallow and brief until proven otherwise. VIX in the low 20's is basically fair historically, and a shade high vs. the realized volatilty backdrop of this market.