The VXST – VIX – VXV – VXMT curve moved from contango to an unusual shape this past week. Lots of things point to the markets being concerned about next week’s ‘should I stay or should I go’ vote in Britain. VXST represents short term SPX option volatility and the options that expire just after the vote are feeding that calculation. I’m going to say results in VXST finishing the week at such an elevated level last week have a little to do with Brexit.
With the big move up in volatility last week, VXX and UVXY both had a good time respectively rising about 8% and 15%. On the flip side of the equation SVXY gave up most of the 2016 gains losing about 10%. I also would like to highlight TYVIX which closed much higher, even though the Fed announcement is behind us. I guess this vote is causing concern across all financial markets. Finally, I would be remiss without noting that VVIX finished the week just over 115.
As mentioned, SVXY took it on the chin last week, but is still slightly in the green for 2016. Both VXX and UVXY had good weeks, but need a few more good weeks just to get back to even on the year.
One trader appears to be looking for volatility to move lower next week and expressed this opinion through selling a put spread on SVXY. Remember SVXY is the inverse of VXX on a daily basis so if VIX futures move lower next week then SVXY will benefit. With SVXY at 52.05 the trader sold the SVXY Jun 24th 44.50 Put for 1.01 and then purchased the SVXY 39.00 Put for 0.46 and a net credit of 0.55.
Note the short strike in this put spread is down about 17% from where SVXY was trading when the spread was initiated. Seeing that got me to do some digging. SVXY has been around since 2011 and we have 245 weekly observations. Of those 245 weeks, only 9 weeks have experienced a drop of 17% or more. Taking things a step further I decided to check into how often SVXY has lost enough value to hit the long strike on this put spread. That would involve a drop of about 33% and it has never happened (not saying it can’t, it just hasn’t) as the biggest one week drop for SVXY since inception is just under 26%.