The curve shift shown below kind of looks like the June 12th line is taking a swipe at the June 5th line with VXST throwing the punch. Short term volatility climbed Friday relative to the other volatility measures and the result was a pretty interesting and possibly worrisome change in the VXST – VIX – VXV – VXMT curve. Time will tell, but VXST at a premium to VIX usually is a result of a market drop or market participants having short term concerns about the equity market. We had a small market drop on Friday, but nothing that we haven't experienced dozens of times in the past few years. I see another FOMC rate decision coming next week as well as CPI being reported Thursday before the open. It could be that some traders are a bit concerned about the market reaction to either or both of those events.
The numbers below show that VXST rose 3% while VIX dropped 3% last week. Both are small moves, but the relative action is what stands out. VXX drifted down some and is down 42% for the year. SVXY and XIV were both up 4% last week and both are up very close to 50% for the year.
With a couple of hours remaining in the trading week and the S&P 500 under pressure one trader put on a position that will benefit from a quick drop in stocks and a subsequent spike in volatility. Specifically the trader purchased the VXX Jul 17th 21 Calls for 0.56 and sold the VXX Jul 17th 30 Calls for 0.12 and a net cost of 0.44. This trade was executed while VXX was trading at 18.21.
Note the payout diagram above highlights some key levels for this trade based on the assumption it is held to expiration which is rarely the case if a spike in volatility were to occur. The break-even price for this trade is 21.44 which is about a 16% move from where VXX was trading when the trade was executed. A 51% move to the upside places VXX at 30.00 which would result in a profit of 8.56. If we were talking about a stock a 51% move would be a bit comical, but in the world of VIX and VIX related markets that’s a potential reality.