Last week the S&P 500 was strong and volatility indexes were weak. I have been focusing on where the VXST – VIX – VXV – VXMT term structure curve has been in 2015 compared to the averages last year. For the first time in a while VXV dipped below the 2014 average with only 6 month SPX implied volatility still higher than the 2014 average so there may still be a little long term concern about the equity markets looming. Over the near term VXST under 10 and VIX back to the tweens indicates complacency abounds.
The long ETPs took it on the chin with VXX down over 11% and the leveraged funds losing over 22%. The inverse funds managed to outpace the drop in VXX rising over 12%. I expect that the volatility tourists may be attracted to XIV and SVXY both up over 28% this year.
Since there was weakness in the long oriented ETPs last week, revisiting a bearish volatility trade and looking at a new one.
Back on March 20th in this space I pointed out a large purchase (over 100,000 contracts) of the UVXY Jan 2017 9 Puts at 3.90. At that time UVXY was at 15.26 and the break even price at expiration is 5.10, a drop of about 75%. Since then, in just three weeks, UVXY has lost 5.04 or 33%. This trade looks good so far as the bid side of the UVXY Jan 2017 9 Put was 5.00 (up 1.10) on the close Friday.
Another similar trade occurred on April 10th involved a long dated put on VXX. With VXX just over 22 there was a buyer of 12,000 VXX Jan 2016 20 Puts at 3.35. The payoff diagram below highlights where VXX closed on Friday along with how far the fund needs to drop (24.7%) for this trade to make it to break-even. Like the UVXY trade, I plan on keeping an eye on the progress of this long term bearish view on VXX.