A Handful of Timely Volatility Trades

VIX is much higher than it was early last week.  So are VXX and RVX.  Also, the S&P 500 and SVXY are both lower.  Anyone can tell you that, so I decided to do some digging and find some timely trades from last Tuesday and Wednesday (or beyond) when the idea of VIX in the 30’s was something that even a permabear would not have imagined.

First I want to highlight a trade I noticed just under a month ago (specifically September 19th) in the CBOE Russell 2000 Volatility Index option space.  Someone came in and bought RVX Oct 29 Calls for 0.25 and as RVX moved up a little that day they also purchased the RVX Oct 30 Calls for 0.25.  The 29’s traded at 1.25 today and the 30’s were bid at 0.75.

Poor old VXX is always getting flack for not providing good long volatility exposure.  When I defend VXX, I say think about owning it like owning a long out of the money call on volatility.  When you own an out of the money call you often lose money when the underlying market moves up just a little.  You definitely lose money when the underlying market is flat or moves lower.  I just described the price behavior of VXX and it has reacted with quite an upside move over the past few days.

Well the underlying for VXX (October and November VIX futures contracts) are up dramatically over the past few days and VXX is up about 25% since last Tuesday (October 7th) closing today at 40.33.  When VXX was trading at 31.13 there was a buyer of VXX Oct 30 Calls at 1.99 that also sold VXX Oct 40 Calls for 0.21 and a net cost of 1.78.  If this trade is held through the close on Friday and VXX finishes the day over 40.00 the net result is a profit of 8.28.

On last Wednesday (Oct 8th) there was a very boring (but profitable) trade executed in VIX options.  There was a buyer of a good number of the VIX Oct 18 Calls for 1.25.  October VIX settlement is not until next Wednesday October 22nd.  I would think a buyer of those VIX Calls would have taken at least a partial profit by now.  There are also several call spreads that were purchased early last week that have increased dramatically in value in about a week and a half of trading.

SVXY is more or less the opposite of VXX.  It takes an inverse position in VIX futures relative to the long position represented by VXX.  The result is a grind higher for SVXY when VXX grinds lower.  It also means that SVXY will drop when VXX rallies and that is exactly what has happened.  SVXY finished today at 53.26.  Last Tuesday when SVXY was at 74.39 someone bought SVXY Oct 24th 68 Puts at 2.10 and sold SVXY Oct 24th 66 Puts for 1.70 and a net cost of 0.40.  If SVXY is under 66 next Friday and if the trade has not been exited early the result will be a profit of 1.60.

I could go on all night, but there are other duties calling me.  I’m looking forward to taking a closer look at all the different ways to get volatility exposure and how those markets acted this past week over the weekend.