With a 17% drop in VIX, the week ended not just in contango, but pretty steep contango. Especially when looking at February versus the spot. Also taking into account there is a week and a half remaining until February settlement. February at almost a 2 point premium to VIX in a pretty good indication that traders are still worried about the health of the overall stock market and the possibility that February settlement comes in higher than current levels.
I’m going to deviate a little and discuss Nasdaq-100 and Russell 2000 volatility. Although I have scaled back on the markets I cover each weekend, I do still update the week over week graphics. It was interesting to note that the April VXN future was actually up slightly last week despite VXN dropping almost 15%. I also noticed that on the RVX curve April is a little elevated relative to the May contract. One twitter response regarding graphic below has to do with the timing of an FOMC meeting (between March and April expirations). My first guess, at least in the case or VXN, was first quarter earnings. Feel free to tweet any thoughts to me at @RussellRhoads
Finally, I was interested to see a block trade go off on Friday that had me pondering the mind of the person behind this execution. In big size there was a seller of 2 VIX Mar 27 Calls at 1.00 who simultaneously purchased 3 VIX Jun 30 Calls for 1.48. I was traveling on Friday so I wasn’t able to head down to the VIX pit and ask if anyone had ideas about the motivation of this diagonal ratio spread. Here’s my guess – first they want VIX to remain under 27 through March settlement. After that, they may consider selling April or May calls against the remaining long position and then even sell June calls against this long position to continue to benefit from time decay. When I return to CBOE on Monday I may have more info, for now I welcome any ideas as to what was going on with this trade.