The equity market seems to be seeing the light at the end of the tunnel and beginning to relate. The tunnel is the psychologically treacherous September – October period. This year the feeling was it was going to be a more treacherous period due to the belief that Fed tapering was on the agenda. An example of the feeling showed up in a comment on this blog site regarding a neutral VXX trade. The poster did not agree with the outlook for VXX and suggested that the markets are going into, “the most volatile period in a generation.” Now that the Fed is providing a new tailwind to the markets fear seems to be quickly dissipating and it is doubtful that the most volatile period in a generation will be showing up in the next few weeks.
Despite a rough Friday the S&P 500 rose 1.3% on the week. If it were not for the market drop on Friday the S&P 500 would have closed the week up 2%. Volatility derivatives reacted as expected and VXX lost 4.4% on the week. On Thursday VXX serial options that expire on October 25th began trading. When I was scanning the news for VXX stories I came across a trade suggestion that appeared on Forbes. The link to the full story is below.
In summary the idea was with VXX trading at $13.61 the VXX Oct 25th 13.50 Put could be sold at 0.92. This is a break even trade if VXX dips to 12.58 and a losing one below 12.58 at October 25th expiration. VXX closed a little higher on Friday at 13.88. The same option appears to be bid at 0.79 so the trade dynamics have changed a bit.
In VIX option trading the focus has fully moved to October contracts. The VIX Oct 18 and 20 Calls appear to be the most popular options for those still looking for a spike in volatility. VVIX finished the week just over 76 which based on all other price action was interesting. When VIX has move to the low teens this year VVIX has been closer to 70 than 80. VVIX is the one piece of the volatility outlook puzzle that area still appears to be looking for near term volatility.