The Week in Volatility Indexes and ETPs – 1/26 – 1/30

Friday the S&P 500 sold off and broke below the psychologically significant 2000 level. Other than being a round number that’s about all the significance I would give to 2000.  If I were still a full time trader the number I would be more concerned with is 1990. The first chart this weekend is a daily closing chart for the S&P 500. I did write a book on technical analysis (like 9 years ago) but do not claim to be a master technician. However it sure appears to me that support for the first month of 2015 has been around 1990. To be specific the intraday low this year is 1988.12 and the closing low is 1992.67.

SPX Daily

I like to look to the volatility markets for some sort of sign as to what the mind of the market may be. Below is the term structure chart of S&P 500 volatility as determined by four volatility indexes – VXST (9 Day), VIX (30 Day), VXV (93 Day or 3 Month) and VXMT (184 Day or 6 Month). The blue line, which shows the curve as of Friday’s close is as flat as I have ever seen it. I have often equated a flat VIX futures term structure to balanced uncertainty among listed derivatives traders. Stated in laymen’s terms, “it appears the market’s outlook is as certain as a coin flip”.


With the VIX term structure all over the place, the long volatility oriented ETPs are had a great January. VXX was up just over 17% to begin the year with TVIX and UVXY putting up 28% gains in January, although for both the unleveraged and leveraged funds almost all the performance came last week.


At least one trader was pretty happy with the drop in the S&P 500 and gain in VXX. Last Friday (the 23rd) someone came in and bought 5,000 VXX Jan 30th 31.50 Calls at 1.16 and sold 5,000 VXX Jan 30th 35.00 Calls for 0.37 and a net cost of 0.79. All this was going on when VXX was trading around 31.46 which is highlighted on the payoff diagram below. The maximum loss was equal to 0.79 while the maximum gain, at expiration, comes to 2.79 which was the result as VXX finished Friday well above 35.00. This is highlighted in purple on the far right side of the chart.