I’m repeating the alteration I did last week to the term structure chart below. Instead of a week over week comparison I show the closing levels for VXST, VIX, VXV, and VXMT relative to the average levels in 2014. Note that near term volatility has thrown in the towel, but concern about a potential downturn for the equity market persists in the three and six month time frames.
Longer dated volatility is still elevated, despite dropping last week in sync with VXST and VIX. A 2.66% rally in the S&P 500 will do that to any equity market volatility index. What also took it on the chin were the long oriented volatility exchange traded funds. VXX and the unleveraged funds lost over 8% and the two leveraged long funds, UVXY and TVIX, both gave up over 16%. This leads me to a massive trade I came across from Friday which is discussed just below the following table.
On Friday one big trader put on a position that expects to profit from the negative roll yield that impacts the performance of one of the leveraged long ETPs. There was a buyer of over 100,000 UVXY Jan 2017 9 Puts who paid 5.10. The exact amount of the block trade came to $53,785,620, but it appears they purchased over 120,000 over the course of the day which puts the number closer to $61 million. Either way, it’s a big trade…
In order for this trade to work out UVXY needs to be under 3.90 come January 2017 expiration. That’s a move lower of about 75% from Friday’s close which is highlighted on the payoff diagram below. 75% may sound like a stretch, but this is not out of the realm of possibility as UVXY lost just over 62% in 2014.