This Week in VIX Options and ETPs

This past week was the worst week for stocks since May. VXX and other long oriented VIX ETPs welcomed this drop with solid bullish performance from VIX which rose almost 6% on the week. VXX receives an undue amount of criticism from the investing public based on the consistent pressure that is exhibited by VIX futures pricing being in contango. However, VIX futures toyed around with backwardation this past week which was an extra upside boost for VXX which rose 8.25%. Backwardation had the opposite impact on the short oriented VIX ETPs which both dropped over 7% on the week.

Despite the volatility in the stock market VIX Option trading was relatively light with a daily average of about 340,000 contracts traded last week. Average daily volume in October was over 450,000 contracts. The November cycle is a five week cycle as October VIX options and futures settled on October 17th while November expiration is Wednesday the 21st. The point is this past week was the mid-point between October and November expiration, a point where it is a bit too early to roll to December. Odds are we will see rolling trades and new positions in December VIX options pick up this next week.

One interesting trade in front of the election was a buyer of the VIX Nov 15/16 Put Stupid on Monday. I spoke about this trade in a video for our friends at optionMonster which prompted the question from one of my biggest fans (I assume) my father Dusty Rhoads who still resides in Memphis, “What is a Put Stupid?”

A stupid spread is a term that refers to an order coming in where instead of spreading off risk there is a long position taken into two options that are both the same type with same expiration date but each has a different strike price. If the spread works it is anything but stupid to trade like this so a more polite way to state this is one of these spreads that has high risk, but high reward if it works out.

As a final note, and something that popped in my mind and I finished up on this blog. One of the ‘reasons’ given for the market’s weakness last week was the pending fiscal cliff. Although this is new news to the popular press, in the VIX arena we have seen trades based on this situation impacting the markets for weeks. Even if you don’t trade VIX, paying attention to what trades and hedges are being implemented using VIX options might give a trader insight into what the next situation that impacts the markets is going to be, that is before that situation impacts the markets.