The week over week numbers do no justice in depicting what happened in the markets last week. For the second week in a row I’m adding a third curve to the chart below. Thursday saw the peak for VIX last week so the purple line below shows the high for the action in the VXST – VIX – VXV – VXMT curve. Notice that the farther dated volatility measures were higher last week. Could the long term view be that volatility will be returning to historical norms in late 2014 or early 2015?
The long funds based on volatility strategies actually outperformed VIX last week as the October and November futures remained at high levels until the stock market rebounded on Friday in response to the employment situation report. Something else I need to point out in the numbers below is VVIX which is the 30 day volatility of VIX options. VVIX remains at relatively high levels compared to recent history where the 70’s has been the norm.
Finally, I have to highlight a trade from mid-morning on Thursday. Someone felt that the market move to the downside was coming to an end and took on a very short term position based on that outlook. With SVXY around 71.60 someone came in and sold SVXY Oct 3rd Puts at between 1.50 and 1.55. Remember that SVXY is a fund based on an inverse VIX related strategy or lower volatility means higher SVXY. The payoff diagram below shows the result of this trade along with SVXY when the trade was initiated and where the fund finished the week. Nice, but potentially gut wrenching trade to begin the month of October.