The S&P 500 rebounded by about 1.4% last week and SPX option volatility moved a bit lower. The VXST – VIX – VXV – VXMT curve shifted lower and flattened. However for a bit of perspective I show where we ended 2015. I think the comparison is a good indication that we may not be completely out of the woods, at least based on the expectations indicated by the various S&P 500 oriented volatility measures.
The rebound in the stock market put some pressure on VXX with fund losing over 6% last week. Do not fret for anyone who purchased VXX at the end of 2015, as they are still up about 25% on the year. Although few (if any) traders take a buy and hold approach with VXX.
A couple of other things on this table caught my eye. VVIX remains pretty high, just a tad under 100. In calmer times VVIX is usually in the 70’s (or lower). SKEW in the 130’s indicates demand remains for out of the money SPX puts despite the strength of stocks this past week.
Mid-day on Friday the biggest VXX block trade of the day was executed. With VXX at 25.74, 0.74 higher than the close of the day, there was a buyer of 10,000 VXX Jan 29th 21 Calls at 4.78 who sold the VXX Jan 29th 24 Calls for 2.14 paying 2.64 for this call spread. The annotated payoff diagram appears below.
As long as VXX closes above 24.00 the result will be a profit of 1.36 and if VXX completely tanks, which would mean a huge rally in the S&P 500, and closes under 21.00 the result is a loss equal to the debit of 2.64. Note I also highlighted where VXX was when the trade was executed and where it closed. There is still a 1.00 cushion before the trader may consider their alternatives, but that is 0.74 less than when they executed the trade.