Santa Claus did not disappoint and his annual rally took the S&P 500 up 3.41% last week.   That move took the air out of the four S&P 500 related volatility indexes with VXST leading the way and losing over 40%.   The curve shift formed the week over week ‘horn’ which I guess is appropriate for the season.


Sticking with a theme I’ve been all over this quarter the S&P 500 is only a few points from setting another record high. Despite this high level of the S&P 500, VIX is at 16.49 is over 2 points higher than the average close for 2014.  This  shows that despite this week’s monster rally concern remains in the pricing of SPX option. Another volatility index that is at high levels is the VIX of VIX. VVIX closed at 99.17 which is the middle of the historical range, but much higher than levels we have become accustomed to in this bull market. The chart below shows the daily prices for VVIX in 2014.

VVIX Daily 2014

I publish the table below each week, but leave out the far right column.  The main reason I do not include the year to date numbers is because I think year over year performance is useless when looking at volatility indexes.  However it is useful when looking at the ETPs.   I wanted to include it this week to show something that is interesting about the performance of the various ETPs in 2014. Note as of Friday all the volatility oriented exchange traded products have lost value in 2014. This is a function of the leveraged long and inverse funds both matching daily performance with compounding coming into the equation when we experience volatility events to the upside or a quick move lower. The trade example from Friday shows that at least one trader does not expect all the funds to be lower for long.

Index ETPs

Friday morning someone came in and did a spread trade that appears to be bearing on VIX which of course is bullish on the stock market. The trade is bullish on SVXY which is designed to return the inverse of the daily returns that one would get from VXX. Therefore, low volatility is good for SVXY, low volatility in VIX normally comes from a bullish stock market move.

I’ll go slow, because there are many moving parts here, but when SVXY was trading at 64.30 there was a seller of SVXY Jan 17th 80 Puts for 15.99 who also bought the same number of SVXY Jan 17th 60 Calls at 8.23 and a net credit of 7.76. The payoff diagram below is a good depiction of what the end goal is for this trade –

SVXY PO Diagram

The goal is to have SVXY as high as possible on January 17th of next year, but as long as SVXY is higher than 66.12 the trade make some sort of profit. Being short the 80 put and long the 60 call results in a 2 for 1 point move between 60 and 80. Once the put is out of the money, the call continues to move higher on a 1 for 1 basis. The risk is a quick move higher in VIX that takes the front two month futures contracts along with it.