Last Week’s VIX Action by Russell Rhoads, CFA

Both the S&P 500 and NASDAQ-100 were up slightly last week and both VIX and VXN were up as well.  That is where the similarity between VIX and VXN action ends.  Despite a higher VIX, all VIX futures contracts were lower on the week.  It appears that risk farther out on the curve is finally coming in.  Every single VIX futures contract settled Friday under 20.00.  If I had an intern I would have him digging through data to figure out when that last happened.

VXN was the strongest of the equity market related volatility indexes rising 1.80% on the week.  The curve action left me scratching my head with February much weaker, March and April trading higher, and May trading down.

VIX was higher by a whopping 0.12 last week, but the two front month futures lost value.  Since the long ETNs are focused on the futures they were down across the board despite VIX ticking up.  It was noted that there was some heavy long dated VXX put buying going on this past week.  One trade saw a big buyer of the VXX Sep 15 Puts for 1.12 that sold VXX Sep 12 Puts for 0.38 for a net cost of 0.74.  VXX is currently at 22.99, so this is a prediction of a much lower VXX by the Fall.

In the VIX Options arena trading continues to focus on farther out months than is the norm.  For instance in a single trade there was a buyer of 10,000 VIX Jun 30 Calls at 0.675 and 20,000 May 30 Calls for 0.55.  Can you say someone doesn’t expect a calm summer?  VVIX was in the mid 70’s for a good part of the week which is below a historical range.  Do keep in mind near dated options feed the VVIX calculation so demand father out does not have a positive impact on the level of VVIX.

There were also some bearish or neutral option trades, but those were focused on the near dated options.  An interesting trade hit the market Thursday morning where there was a seller of the VIX Feb 14 Straddle for 0.95.  If this trade is held to settlement this trade pays off with February VIX settlement between 13.05 and 14.95.  In the more bearish camp was a pretty exotic trade.  A trader bought the VIX Feb 14 Put, Sold a Feb 17 Call, and finally bought a Feb 20 Call for a net cost of 0.10.  The best case is for a low VIX settlement and a profit will be made below 13.90.  The downside is the upside here, if VIX rallies and settles over 20.00 the maximum loss could be 3.10.

Remember tomorrow is February VIX expiration so there are only a few more hours to participate in Feb VIX and VXN trading.  Then it is on to March.

The posts on this blog are opinions, not advice.
Please read our disclaimer for Indices.

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