This Week in Volatility Indexes and ETPs – 8/8/2014

I liked the chart below so much I tweeted it before I wrote anything about it. Last week the indexes that measure different implied volatility periods based on the SPX option trading came back to the comforting contango shape we are all so used to. The shape is ‘normal’, but since volatility should be looked at relative to recent history I thought adding a third curve that displays the average closing prices for VXST, VIX, VXV, and VXMT in 2014 was worthwhile. The shape is normal, but the risk levels are still elevated relative to most of this year. VXST VIX VXV VXMT Curves

In the ETN space the funds that based their performance on VIX futures strategies were higher despite a drop in VIX.   We can attribute that to the September VIX future rising (slightly) last week. September is now the dominate contract for VXX and was 72% of the strategy as of Friday last week.

Option ETN Table

Finally, I came across a trade from Friday in VXX where someone does not think we are done with higher volatility in August. There was a buyer of 10,000 VXX Aug 29th 30 Calls at 4.90 who also sold 10,000 of the VXX Aug 29th 33 Calls for 3.00 which comes to a net cost of 1.90. The best case for this trade is VXX at or above 33.00 on the close on Aug 29th where the trade will turn a 1.10 profit. With VXX closing at 33.21 on Friday I would say the expectation is based on another volatility spike or two between now and late August.

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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…