I noticed recently that the VXN Index is trading at higher levels than the VIX Index. This is highly unusual, and I think that it deserves some attention and explanation.
Most readers are familiar with the VIX Index, the Chicago Board Options Exchange (CBOE) Volatility Index, but some may not be familiar with its counterpart VXN, the CBOE NDX Volatility Index. Where VIX is a measure of volatility expectations on the S&P500 (SPX) Index, VXN is similarly constructed to measure volatility expectations on the NASDAQ 100 Stock Index (NDX).
It would be normal to expect that the tech-heavy and top-heavy NDX would be more volatile than SPX, and that is correct most of the time. As the middle left graph below shows, VIX exceeds VXN only rarely. The last instance occurred during the volatility explosion (aka “volmaggedon”) that we saw in February 2018.
I attribute this disparity to the extreme demand for protection in this tumultuous environment, and traders seeking protection tend to gravitate to the more liquid VIX. Also, we have seen some relative outperformance by NDX over SPX in recent sessions, meaning that the index is projecting lower volatility into the near future.
This may be a fleeting observation, and could be related to tomorrow’s weekly expiry or next week’s quadruple witching expiration. But it certainly bears examination while it lasts.
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