In an interesting twist VIX was the underperforming index across the VXST – VIX – VXV – VXMT curve rising only 0.01 last week. It is unusual for VIX to be an outlier like this, but even more so when we experience a three day weekend which one would expect to put some pressure on VXST relative to the longer dated volatility indexes.
VXX rose about 7 ½% last week despite the paltry 0.01 gain in VIX. We all know that VXX is not VIX or even any sort of direct exposure to spot VIX. VXX is a consistently rebalanced portfolio focusing on the front two month VIX futures contracts which until this coming Wednesday consists of the January and February contracts. January VIX rose 4.75% last week and February was higher by 5.53%. However, January closed at a premium relative to February every day last week which added to the VXX performance as what is called the roll yield (and is usually a negative experience for VXX performance) was very much a positive.
SKEW and VVIX finished the week at elevated levels, although VVIX was down slightly. Both are indicators of concern about downside for the equity market so both are showing many market participants believe there is more to come despite the worst ten day start for the stock market on record.
What has been good for the long ETPs has been a catastrophe for the short funds, for example SVXY is down more than 28% in 2016. It appears to me that someone may be expecting more downside from SVYX. Late Friday with SVXY at 36.01 there was a seller of 500 of the SVXY Mar 18th 25 Calls for 12.50. This trade took in 1.49 of time value but for the most part is a short play on short volatility (negative times a negative is a positive so it’s a play on long volatility as well). It is possible the trader also holds a large long position in SVXY and is hedging the trade by selling a deep in the month call. Either way this shows worry that what we have experienced to start 2016 may be expected to continue, at least for the next few weeks.