U.S. Markets closed

Is Volatility Set to Sink in September?

Karee Venema

The U.S. stock market sold off sharply in August as U.S.-China trade tensions ramped up. The negative price action in equities created a boon for several volatility trackers, including the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX), which rallied all the way up to a two-month high of $31 by mid-August.

This region coincided with the exchange-traded note's (ETN) 160-day moving average, which has had bearish implications in the past -- and following a swift rejection from here, the shares were trading all the way down to $25.75 by Aug. 22. With VXX once again testing this trendline amid a fresh round of U.S.-China trade headlines, history suggests volatility could ease in September.

Specifically, VXX is now back within one standard deviation of its 160-day trendline after a lengthy stretch below it, defined for this study as having traded south of the moving average 60% of the time in the past two months, and in eight of the last 10 trading days. There have been four similar occurrences in the last three years, and VXX was down 11.9%, on average, one month out, with not a single return positive.

This theory that volatility's about to cool down is being echoed in a descending buy-to-open call/put volume ratio on the Cboe Volatility Index (VIX). In this week's Monday Morning Outlook, Schaeffer's Senior V.P. of Research Todd Salamone notes how a "current lack of intense [VIX] call buying could be indicative of another notable volatility spike not being on the immediate horizon."

Meanwhile, the 20-day call/put volume ratio for VXX across the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) currently sits at 1.16 -- up from its early August readings near 1.10. The September 28 strike is home to peak front-month call open interest of 23,290 contracts, and data confirms at least some buy-to-open activity here.

On the flip side, the September 17 put is VXX's top open interest position, with nearly 54,000 contracts outstanding. A number of these options were also bought to open, as volatility traders position for a swing below $17 over the next several weeks. Today, the shares are trading up 5% at $28.34.

vxx daily chart sept 3