VIX closed under 16.00 for the first time since all the hubbub that occurred in late August as the S&P 500 continued to recover last week gaining 0.90%. Among the four S&P 500 focused volatility Indexes VIX was the biggest loser shedding almost 12%. I had been keeping a close eye on VXV as the 3 month time frame that VXV measures comes after the December FOMC announcement. VXV fell a bit relative to VXMT (6 month volatility) which may be a FOMC indicator and may also be attributed to VXV’s time frame pushing to January, when the final Fed meeting of 2015 will be safely in the rear view mirror.
Two things stand out on the table below, VVIX and SKEW. Despite the drop in VIX, the VIX of VIX (VVIX) rose last week to 97.58, which indicates demand abounds for VIX options despite or maybe because of the recent drop in VIX. I say because of the drop in VIX since some traders may see this as an opportunity to get relatively cheap tail risk protection.
SKEW has been closing at record levels as of late which shows that concern regarding outlier moves to the downside persist despite the S&P 500 marching higher. When SKEW is at elevated levels this means out of the money SPX puts are ‘rich’ compared to puts with strike prices closer to the S&P 500 which in layman’s terms means demand for protection against a large drop in the S&P 500 is still high.
I came across sort of an unusual VXX spread trade mid-day Friday. With VXX around 19.90 there was a buyer of the VXX Oct 30th 23 Calls who paid 0.48 a contract and also decided it was a good idea to sell an equal number of VXX Oct 23rd 22 Calls for 0.32 resulting in a net cost of 0.16 for the diagonal spread trade. A quick glance at a calendar of economic events may shed some light on the thinking behind this trade. The position is short VXX calls that expire in a week and the economic calendar next week appears fairly light. Looking to the week that ends October 30th, we have two of the big three economic announcements – an FOMC meeting and 3rd quarter GDP. It could be one trader is betting on calm next week before a storm the following week.