Weekend Review – Volatility Indexes and ETPs – 2/29 – 3/4

The S&P 500 rose about 2.7% last week and shorter term volatility took it on the chin with VXST and VIX both down over 14%.  The longer dated volatility indexes were lower as well, but as show below, remain elevated compared to their respective averages last year.  You can read that as the market still bracing for higher volatility over the balance of 2016 (or at least until 6 months from now).


The long and long leveraged VIX realted ETPs were down last week with VXX dropping 10.78% and UVXY losing 21.65%.  For the year VXX is still in the green by 8.76% and UVXY is up as well, but only by 7.99%.  That financial compounding thing really does rear its ugly head with respect to leveraged funds, regardless of the underlying market.

VVIX has been getting a lot of attention as the VIX of VIX creeped to post August 24, 2015 lows this past week. When VVIX shows real complacency the first digit is a 6, so take testing the 80 level signaling calm as not being entirely accurate.

VXX Table

With SVXY rising over 10% last week, short volatility is quickly coming back as a desirable strategy.  I came across an early Friday bullish SVXY trade that is the most basic of structures, but could be a heck of a speculative trade if VIX remains in the teens and the VIX term structure remains in contango.  With SVXY at 42.05 someone came in and bought just over 100 SVXY Mar 18th 50 Calls at 0.05.  The payoff shows up below, along with Friday’s closing price of 41.55.


In order for this trade to turn a profit SVXY needs to rise to 50.05 in the next two weeks.  That’s a gain of 20.46%.  This got me to looking at the historical numbers.  There are two weeks to expiration so I took a look at historical two week performance for SVXY.  Since SVXY was launched in late 2011 we have 227 two week observations to work with.

First I did the minimum of work and noted how often SVXY was up over 20.46% in two weeks just using the two week Friday close to close prices.  It turns out that only 6 of 227 weeks (2.6%) saw SVXY close up enough for this purchase of the 50 calls to result in a break even or better trade.

However, I’m not lazy and I know we don’t have to hold trades through expiration.  Therefore I took a look at how often the high over a two week period for SVXY was greater than the 20.46% threshold, this happened 15 of the 227 weeks (6.6%).  So rounding numbers this trade has about a 5% chance of working out depending on how nimble the trader is and what happens in the volatility markets.  Either way for 0.05 one trader got very cheap short exposure to volatility with very little downside if the market doesn’t go their way.