What a difference a week can make in the volatility world. The CBOE Short-Term Volatility Index (VXST – 20.84) rose over 80% while the CBOE Volatility Index (VIX – 18.14) was up a paltry (insert sarcasm) 45% last week. That’s what a couple of triple digit down days for the Dow Jones Industrial Average will do to market volatility. Note the curve shift below to illustrate the short term moves, but also of interest to me is the action, or lack there-of, for the CBOE 3-Month Volatility Index (VXV – 17.40) and CBOE Mid-Term Volatility Index (VXMT – 18.18) which were up about 19% and 11% respectively. Whatever fear there is in the equity markets, it is definitely short term fear. Every spike down in the equity market in 2013 was followed by a rebound, the volatility markets seem to be buying into a continuation of this pattern.
Before the excitement that ended the week there was an interesting VIX option trade that focused on February coming into the pit on Wednesday. This was more of a neutral trade with an expectation that in February VIX will be in the 13 range. The trader was a seller of the Feb VIX 13 Straddle for 1.70 (1.35 for the call and 0.35 for the put) also buying the VIX Feb 16 Calls for 0.59 and a net credit of 1.11. The payout appears below –
Note that the best case scenario has VIX February settlement at 13.00. The biggest loss to the upside is if VIX is over 16.00 with a resulting loss of 1.89 per spread. Finally, theoretically (emphasis on theoretically) to the down side if VIX is at 0.00 then the trade would be a loss of 11.89. However, historically VIX has not ventured much below 9.00 so the trader probably has that as a worst case scenario.
If the ETP space the unleveraged long VIX ETPs were up between 8.5% and 9% for the week. The VIX futures market did not react to this past week’s action nearly as much as the underlying index did and that resulted in decent, but not spectacular moves from the ETPs.