The VXST – VIX – VXV – VXMT curve shift was the most dramatic change I have seen since writing these blogs. Of course VXST is just a little over a year old so there’s not too much history for comparison. I am more intrigued by the right side of the curve with VXV and VXMT in the 20’s. As a reminder VXV is a 3 month version of VIX and VXMT measures 6 month implied volatility. Those two indexes moving above 20 and in line with VIX indicate some real concern for the S&P 500 going into next year.
Many things stand out from the market action last week. One that is almost over the top is VVIX (the VIX of VIX) finishing the week at 138.60. VVIX data goes back to 2007 and Friday’s closing level was the 3rd highest VVIX close over that time period. The chart below shows the complete history for VVIX. When this index is high (like now) it indicates increased demand for VIX options. Since over 70% of VIX option volume was on the call side Friday we can safely say that this elevated level for VVIX show strong demand for VIX calls.
VVIX Daily Closing Prices - 2007 - Present
VXX and the long ETPs gained about 30% on the week, the two leveraged ETPs moved up close to 60%, and the two inverse funds were down about 25%. Compounding does funny things to the performance of inverse and leveraged funds. For instance for 2014 VXX is down 20%, UVXY (2 x long) is down 55%, and SVXY (short) is down 12%.
Late Wednesday, with UVXY up 3.16 on the day trading at 23.18 a share, someone came in with a timely buy of the UVXY Dec 12th 22 Calls at 1.98. Imagine buying calls on a market that is up about 15% on the day. Take that a second step and imagine buying calls that expire in 2 days on a market that is already up 15% for the day. Kind of a risky proposition, but not in the world of double leveraged volatility ETF’s. Take a look at the payoff diagram below where I highlight UVXY’s price at the time of Wednesday afternoon’s trade along with where UVXY settled on Friday (when the options expired). Not too shabby for a two day trade.