Daily Options Report

It's a Very VIX World as we all know, but it's far from the only volatility index out there. Among others we have RVX, a proxy for Russell options. Can we learn much comparing Russell vo; to the Good Ole VIX? Steve Place has this to say.

One relationship I’ve been watching was the relationship of smallcaps and the S&P. The rule of thumb is that when smallcaps are outperforming, that means there is an appetite for risk and beta-chasing in the market, and upside momentum should follow. However, we’re still in a period of a highly correlated market so while that signal is valid, I started to look for other indicators related to this relationship.

Enter the volatility indicies. We normally hear of the VIX, which is the normalized expectation of volatility 30 days out. This is based on the perception of market risk via the SPX options board. We also have the RVX, which is analagous to the VIX except it uses RUT options. So there are two measures for market risk, but they are different markets.

.......By looking at the key “turning points” in the moving average, we can see that this is a leading indicator in the markets. This makes sense– when higher premiums are being paid for “riskier” names, that means option players are starting to anticipate a slowdown in risk assets, which also include equities.

I’m not sure if I can derive any predictive power out of this relationship, but it is something worth looking into.

Indeed. The chart above shows 20 Day MA for RVX:VIX over the past 2 years. I'd agree with Steve, it's pretty interesting, but not quite ready for any sort of predictive power. I'd say the most you can glean here is that upslopes in the ratio coincide with bull moves. Which in a way is odd, shouldn't you see greater fear in smaller stocks at sentiment extremes? That's what I would have thought, but the nature of the market is quite the opposite. When you see fear, literally the first thing you get is a run to SPX puts. Which would obviously cause this ratio to tank.

So right here right now, this tiny indicator actually speaks bullish for the market.

But what if we take this one step further, does it say anything about the relative performance of Small vs. Big going forward? Well, here's a graph of that ratio over the past 2 years.

Well, the last couple troughs in the volatility ratio were good times to go long IWM instead of or against SPY. But you would have gotten positively smoked trying that in October 08. Then again Fall 08 was just one big outlier stretch to begin with.

So why is this ratio in general a better concept than SPX:VIX for one? Well, at the very least, it's an apples to apples comparison, vol. stat vs.vol. stat. It's by no means anything magical, just another perspective.