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Volatility, Short ETFs Lower After Jackson Hole Speech


Volatility-linked ETFs followed the CBOE Volatility Index lower Friday and U.S. stocks rallied after Federal Reserve Chairman Ben Bernanke’s speech at Jackson Hole fed speculation the Fed will announce more stimulus at its September policy meeting.

The VIX moved lower Friday after advancing the previous four sessions.

The iPath S&P 500 VIX Short Term Futures ETN (VXX) and VelocityShares Daily 2X VIX Short Term ETN (TVIX) were down 3.4% and 5.1%, respectively. The products are designed to replicate the performance of a VIX futures contracts. [Why Volatility ETFs Aren’t Matching the VIX]

Fed chief Bernanke “left little doubt that he is looking toward doing more to give the economy a lift at the Fed’s next policy meeting in September,” reports Jon Hilsenrath at The Wall Street Journal. [Gold, Miner ETFs Jump After Bernanke Speech]

However, stock traders were hedging on Thursday before the Bernanke speech. The note below is from Paul Weisbruch, head of ETF/options sales and trading at Street One Financial, that was sent Friday:

“Yesterday amid the broad market sell-off, VXX (iPath S&P 500 VIX Short Term Futures ETN) options were active, with mainly call buyers. Registering a multi-week high yesterday, and with the VIX itself rising more than 4% yesterday and now trading with a $17 handle, these VXX call buyers seem to be positioning for additional volatility to enter the marketplace.

In other activity, bears were active via ProShares Ultra Short S&P 500 (SDS) call options in purchasing these contracts, and are likely either aggressive hedgers if not outright bearish speculators positioning themselves ahead of the ECB results.

Finally, after many months of doldrums and lack of interest, SPX (S&P 500 Index) options have traded actively in the past two sessions, with steady accumulation of September ‘quarterly’ 1385 puts. If we rewind the clock back one year (plus or minus a few days) from today, a 4% daily intra-day move in the SPX (and the corresponding move in the VIX itself, not to mention the dislocated moves in VIX related ETPs) would be a walk in the park.

Today, we struggle with a VIX that can’t stay above $16. The S&P 500 Index seems to be clinging, from a psychological standpoint, to the 1400 level in recent sessions but from a pure technician’s perspective, 1375 in the SPX appears to be more realistic support.”

iPath S&P 500 VIX Short Term Futures ETN

Full disclosure: Tom Lydon’s clients own TVIX.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.