This Week in Volatility Indexes and ETPs – 9/19/2014

The volatility indexes that are based on the S&P 500 fell back into order as the S&P 500 rebounded to another all-time high.  I am not a guru, do not claim to be (actually who does that?), but did note in this space that despite a tough beginning to September the volatility indexes were not showing the market had any fear.  Again they seemed to anticipate the stock market continuing higher and got it right.


The long volatility oriented ETPs now are heavily focused on October VIX futures since September volatility oriented futures and options settled Wednesday morning. With VIX remaining at low levels VXX and the other long strategy oriented products continue to experience a drag on performance that has become commonplace.  Below the table I cover the last big VXX trade of the week which seems to be looking at some spikes for VXX between now and early 2015.


My office at CBOE is located just close enough to the trading floor that I can hear a little of the open outcry action from my desk. Late Friday I heard a yelp from the VIX pit in what turned out to be a pretty large straddle being sold on VXX.  With VXX at 27.23 someone came in and sold 44,750 VXX Jan 30 Calls for 2.65 and 44,750 VXX Jan 30 Puts for 5.65.  The net result is someone being short 44,750 VXX Jan 30 straddles and taking in 8.30 per spread.  For those wanting exact numbers, 8.30 x 100 x 44,750 = $37,142,500 before commissions.  The payout diagram below shows that VXX needs to settle right at 30.00 on January 16 of next year for that who credit to turn into a profit.  Note that some sort of profit can be realized with VXX between 21.70 and 38.30.  To end up in that range, a couple of volatility spikes would be needed between now and the third week in January.  We can call this a neutral trade, but in reality this is a trade that relies on some volatility spikes over the next few months in order to turn a profit.