Four out of five days last week the S&P 500 hit a new record high. In reaction to the S&P 500 climbing to what some traders consider nose bleed territory three of the four volatility indexes based on SPX option trade dropped in value. The move lower in VXST was a bit overdone and the 7.93% move gets a little bit of an asterisk in this situation since holiday weeks put some extra pressure on this measure of nine-day implied volatility.
As I have done for three weeks I also included the average term structure close on for the 45 days that the S&P 500 closed on an all-time high in 2014. Sticking with the three out of four theme – VIX, VXV, and VXMT all remain at interesting premiums relative to the average for SPX record days.
Note the long ETPs on the table below. The long funds focused on the near dated futures were lower, but VXZ which gives traders exposure to the fourth through seventh month (February – May) VIX futures managed a small gain on the week.
There was one trader thinking short term and thinking volatility spike late Friday afternoon. The method they choose to get long volatility is a great example of how many alternatives there are in the volatility trading space to put on a position. The trade was based on the ProShares Short VIX Short-Term Futures ETF (SVXY – 74.34) which will lose value if we get a ‘volatility event’ next week. Specifically a trader bought SVXY Nov 28th 75 Puts for 1.80 a little over an hour before the market closed. The payoff diagram below shows the potential outcome if the trade is held through the close next Friday. SVXY fell from the mid 70’s to the mid 50’s in a very short period of time in October. A repeat of that next week and someone will be having a happy holiday season.