This Week in VIX Options and ETNs – 1/17/2014

I recently was reminded that I am advancing in age when I pulled out my college derivatives textbook and noted that an S&P 500 Index option example was based on the S&P 500 being quoted at around 300.00.  My how things have changed…

My market analogy this week is also a huge throw back and demonstrates that I have been around for awhile.  When I was growing up Sanford and Son was part of the regular viewing schedule in the Rhoads household.  For those that are scratching their heads at a reference to Sanford and Son the show starred Redd Foxx as Fred Sandford who is a ‘junk dealer’ in Los Angeles.  Periodically, when he was trying to get his way, Redd Foxx would feign having a heart attack and say something like, “this is the big one, this time its real”.  His son would basically ignore the antics.  The more times the market dips and then rebounds the more traders are acting like Fred Sanford’s son and not reacting to the momentary drop.  So far they have been right.  However, the continued complacency is also resulting in low volatility levels and inexpensive option prices.  Eventually some traders that have gotten long volatility are going to be rewarded when the next volatility event (big one in Fred Sanford terminology) comes.

A hint that some traders may think a big one is coming sooner rather than later shows up in the VXST – VIX – VXV – VXMT curve shift last week.  Note the far left side of the curve that shows VXST moved up relative to the volatility indexes that focus on farther dated options.  This occurred while the market was relatively quiet.  There is a FOMC announcement on January 30th and SPX options that expire on the 31st are in the VXST calculation.  Could be some traders expect a little market action before the end of January.

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In the ETN space the near dated VIX futures were higher and that pushed VXX and the other long VIX related ETNs to higher levels.  Do keep in mind if you are trying to pin point a trade around the Fed meeting VXX, SVXY, and UVXY all have weekly options that expire on January 31st so the timing matches up pretty good for a January 30th announcement.

VIX Options and ETNs