This Week in VIX Options and ETPs – 2/28/2014

I haven’t been monitoring the VXST – VIX – VXV – VXMT curve for too long, but this is the first instance of VXST and VIX moving in opposite directions in a week.  I’m sure it has happened in the past, I just do not have any recollection of such.  Three of the four of the volatility indexes that are calculated using S&P 500 Index option pricing were higher on the week.  If you only watch VIX you would believe that implied volatility dropped, but for near dated and longer dated SPX options that was not the case.

VXST - VIX - VXV - VXMT

Despite VIX dropping on the week, one trader seems to be looking for a spike in volatility between now and the middle of April.  On Thursday there was a buyer of just over 9,800 VIX Apr 18 Calls at 1.10.  Normally a single option trade is nothing to really get excited about, but in the VIX world is has a bit more meaning.  Typically larger trades are part of some sort of spread where some of premium on the long side is offset by selling an option.  Of course generally downside risk is taken on or upside performance is given up when a trader does a spread trade.  Buying a VIX call option outright is a pretty aggressive trade.  The payout diagram below shows the payout at April expiration along with where VIX and the April VIX futures closed on Thursday.

VIX Call PO

 

In the ETN space VXX was higher based on the rise in the front month VIX futures contracts.  As the week came to an end VXX was comprised of about 57% March VIX Futures and 43% April VIX Futures.  Each day that weighting changes as VXX is focused on a 30 day average.

Options ETNs

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Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…

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