Speculative Players Still Not Complacent on the VIX

The calendar year 2017 was a remarkable one for the CBOE Volatility Index (VIX) in more than one regard. VIX registered an all-time low of 8.56, and rose only as high as 17.28 -- its lowest annual high of the past 20 years. It also marked the fourth consecutive year where VIX declined, which last occurred during the stretch from January 2003 to December 2006.

The average daily VIX reading last year was just 11.09 -- not too far removed from single-digit territory. That's down quite a bit from its five-year average of 14.24 and its 10-year average of 18.75, and it's nearly half of the 20-year average VIX print of 19.64.

Of course, there's nothing particularly shocking about the VIX declining while stocks rise to new highs. But the degree to which VIX has "imploded" over the past 12 months, even relative to other bull-market periods in recent history, has rightfully generated some interest among Wall Street pundits. And how have options traders responded?

Well, VIX calls remain the dominant choice, with the roughly 8.5 million call contracts in open interest easily outstripping the 2.3 million puts outstanding. But it's hard to say whether this reflects a general certainty that VIX is due to spike, or simply the broad agreement that a VIX move significantly lower from here falls into the "low probability" category. And of course, the preponderance of VIX calls could also be indicative of hedging activity on the part of those who are long equities (which is a somewhat smaller club than it used to be, per the three-week decline of 51.5 points in the National Association of Active Investment Managers exposure index -- the largest such decline in about a decade).

Focusing in on the front-month January 2018 options series, the most crowded strike is the deep out-of-the-money VIX 25 call, with 615,793 contracts in open interest. Data from the Chicago Board Options Exchange (CBOE) indicates a skew toward buy-to-open volume at this strike, including two days in early December with overnight open interest builds in excess of 9,000 contracts apiece. One-month VIX futures (VXc1), which serve as the underlying asset for VIX options, haven't crossed above 25 in almost two years.

Over the past 10 days, meanwhile, it's the VIX January 18 call that's drawn the largest open interest build, with 114,427 contracts added over this time frame -- and that doesn't even account for the 100,236 contracts CBOE says were bought to open on Dec. 20 (when the spot VIX printed as low as 8.90 on an intraday basis). For perspective, front-month VIX futures haven't risen above 18 since the November 2016 U.S. presidential election.

On the flip side, the most popular VIX put strike is the January 12, where 409,656 positions have been accumulated -- and about 57,000 of those were bought to open during the first three trading days of December, per CBOE. And while VXc1 briefly popped above 12 on Dec. 1, it's been pretty firmly below that level since; as of Friday, the 10-day moving average stood at 11.02.

So, circling back to our initial query -- options traders have responded to an unprecedentedly low VIX by purchasing massive numbers of out-of-the-money VIX calls, and a decidedly lesser number of in-the-money puts. Whether these options were purchased as pure speculative plays or as part of a broader hedging strategy, we'd venture to say that traders are not yet displaying the type of complacency or euphoria we'd associate with a market top (or, more to the point, a VIX bottom).