This past week the S&P 500 recorded a record high on 3 of the 4 trading days with Friday being number 52 in 2014. I did some digging on this topic and 52 new highs in a year is less than the number of new highs just last year. Last year the S&P 500 set 69 new highs, but that still isn’t the record number of new highs in a single year. 1995 holds that distinction with the S&P 500 closed at a record level 77 times.
The term structure curve is returning to normal based on the price action in the S&P 500 last week, but still elevated relative to record S&P 500 days. VXST is seeing some extra pressure due to the holiday this coming week. The longer end of the curve shifted lower, but not nearly as much as the drop in VIX and VXST. I also added a third curve here to compare volatility on the 52 days the S&P 500 closed at a record high this year with Friday’s close. Note the purple line is much lower than Friday’s closing curve.
I left the year to date information on this table this week as I wanted to point out the performance of SVXY this year. SVXY is one of the two very actively traded funds that match the daily short performance of a portfolio that is short the front two month VIX futures contracts. Conventional wisdom in the financial markets is that selling volatility is like picking up nickels in front of a steam roller. As of Friday SVXY was up just over 1% for 2014. Anyone that held SVXY for all of 2014 earned that 1% as on February 5th the fund was down 24% and over the course of 2014 SVXY has experienced a drawdown of over 40%.
There was at least one VXX trader looking for steady to lower volatility into next year. About 30 minutes after the market opened on Wednesday someone came in and sold more than 10,000 VXX Jan 32 Calls at 0.93 and bout the same number of VXX Jan 36 Calls for 0.52 and a net credit of 0.41. VXX finished the day at 28.31 so this trade is safe as long as VXX does not move up more than 13% by January 16, 2015 or over 32.00. In the VIX world that’s just one good day for VXX and one bad day for the S&P 500. The worst case scenario is for VXX over 36.00 at expiration which would result in a maximum loss of 3.59.