On a week over week basis the S&P 500 was down fractionally. One would not assume such a small move from SPX when looking at the VXST – VIX – VXV – VXMT curve below. VXST and VIX made nice moves to the upside while the longer end of the curve moved up a bit less resulting in a slight flattening of the curve.
The long funds that focus on the first and second month futures were up slightly while the short funds were down slightly. SKEW and VVIX both moved up nicely last week which should be encouraging for volatility bulls or equity market bears.
The three funds that represent long (VXX), daily double long (UVXY), and daily short (SVXY) have had very divergent performance this year and last week didn’t really change much on the year to day performance below. SVXY did manage to top up 100% early in the week before falling off a bit.
The majority of volatility indexes quoted by CBOE were higher last week. If it weren’t for earnings from GOOG, IBM, and AMZN which resulted in a volatility crush in options on those stocks there would probably be more green on the table below.
Early Thursday, before volatility finally started to get moving someone came in and bought a large number of out of the money VXX calls with an outlook that appears to hope for an overdue volatility spike between now and September 15th. With VXX at 11.00 they purchased just over 2500 of the VXX Sep 15th 15 Calls for 0.34. Note about a 40% move is needed for this trade to break-even at expiration, for most markets that’s unheard of, but not in the volatility world.
This past week is one of those weeks where those new to VIX futures get a lesson in price behavior and the lack of fair value that exists between the futures and the spot index. VIX rose almost 10% on the week, the August contract was unchanged and the rest of the curve actually moved lower. The curve had been steep and the result was futures not budging too much when VIX got moving to the upside.
As we enter the last five months of the year I would like to highlight where we are compared to VIX history going back to 1990. Below is a chart showing the high, low and average close by year for the full history of VIX.
We have been fixated on putting in a new all-time closing low (9.31 in 1993), which has not happened. However, the average closing price for VIX in 2017 is 11.39 which is a full point below the average closing low for VIX that occurred in 1995. In order to avoid 2017 having the lowest VIX average close on record we need to average about 13.74 over the remaining 107 trading days this year. That would involve a pretty sustained volatility event considering how quickly VIX drops after any sort of strength these days. I’m not saying it is going to happen, I’m just pointing out what has to happen.
Finally, with an hour to go in the trading day on Thursday one trader came in who does not think VIX is going anywhere above 13.00 over the next few weeks. With VIX at 10.80 and the September contract at 12.80 there was a seller of the VIX Sep 13.00 Calls for 1.42 who then purchased the VIX Sep 20 Calls for 0.56 taking in a net credit of 0.86. The payoff at September 20thAM settlement shows up below.
Of course, the goal is for standard September VIX contracts to settle below 13.00, but anywhere under 13.86 would result in at least a partial profit. Of the 144 trading days, we’ve experienced in 2017 only 11 have had closed over 13.86, so at least based on recent history this may be a smart trade.