With VIX up this week VXX was higher as well. VXX generally has an extra hurdle to overcome in the form of the shape of the curve of VIX futures prices. VXX follows a strategy that owns the front two month futures contracts (currently November and December) and reweights these positions daily with the front month being sold and second month being purchased. Typically the front month is at a discount to the second month, but there are periods where the front month moves to a premium relative to the second month. This usually occurs when VIX moves up rapidly and the futures contracts lag this move. In these instances VXX actually benefits from a combination of higher absolute and relative VIX futures prices. On Tuesday this past week with VIX up over 12% the November contract was up more than the December contract. There was even a Wall Street Journal article saying we may be going into backwardation (the name for near month futures being at a premium to farther dated futures). The curve came close, but settled back into the same old shape by the end of the day Tuesday. Despite this VXX managed to rise almost 4% last week.
On Tuesday VIX rallied over 12%, interestingly an investor did come in on the heels of this VIX strength and sell 32,000 Nov 19 Calls at 1.9250 (average price). This is a risky fade of the move higher in VIX as any spike in volatility could rapidly push VIX to the 20’s.
Although VIX November expiration is not until the 21st of next month, there was already some rolling of November positions to December this week. The feeling was with November VIX up a bit relative to the December contract, traders were taking the opportunity to move positions out to December at a low cost. A rolling trade of note on Thursday saw a seller of 57,000 the VIX November 21 / 35 Call Spread and subsequent purchaser of 106,000 of the VIX December 23 / 35 Call Spread.
Coming up next week we once again a monthly employment report on Friday as is typical of the first Friday of each month. The reaction is always interesting for the S&P 500 around the employment number and subsequently for VIX options as well.
Finally a good friend of the Options Institute, Andrew Keene, blogged on a couple of other VIX option trades of interest this past week –