The Week in Volatility Indexes and ETPs – 5/26 – 5/29

Short term volatility rose last week based on stock market action and some impact from the holiday weekend. VXST’s 42% rise is partially attributed to the three day weekend being behind us and we can probably give a little credit to the day off Monday for the 14% rise in VIX. The issue that has nothing to do with the four day work week is the shape of the curve below which shows VXST is basically in line with VIX as of Friday’s close. This is an indication that option traders are bracing a little for next week which could bring news from Greece as well as definitely learning about the employment situation in the US during May.


The long volatility related rose a bit last week with the gain in VIX and VIX futures that resulted from the almost 1% drop in the S&P 500.

VIX Table Corrected


As mentioned, VXX was up slightly for the week, but one trader appears to be looking for the move higher to be short lived. About mid-day on Friday, with VXX trading at 19.18, a trader came in and sold about 1,000 VXX Jun 6th 17.50 Puts for 0.03 and then 30 seconds later purchased the same number of VXX Jun 6th 18.00 Puts for 0.10 and a net cost of 0.07. If VXX finishes the week next week at or below 17.50 then the result is a profit of 0.43 which shows up nicely on the payout diagram below.


I highlighted the difference between where VXX closed on Friday and the short strike of 17.50 which is very close to 8% lower than where the fund closed on Friday. That 8% level sparked my interest and I did a little more digging based on that price point. I pulled weekly data on VXX since the fund was launched in early 2009. Of 330 weekly observations, VXX has lost 8% or more 61 times or just under 20% of the time. So with this trade there is a risk of 0.07 and a potential gain of 0.43 and based on history there is just under a 1 in 5 chance this trade will work out. A consistently calm or bullish stock market next week will be the key for potential success, but based on what has happened in the past, that 8% drop isn’t too farfetched.