The S&P 500 was slightly lower last week, ruining a five week winning streak.  This gave three of the four volatility indexes on the chart below a chance to rebound from 2016 lows.  The exception is VXST, but we give this one a break since three day weekends are always tough on VXST.


The choppiness in the volatility space last week, along with the front month future actually losing a little value did no favors for the VIX related ETPs.  UVXY was up almost 9% for the week early Thursday, but gave all that up before we all ran out to various long weekend destinations.  Do note, VVIX and SKEW continue to remain at relatively high levels.  Take that as the all clear has not been signaled, despite a strong equity market.


VXX Table

I’m always talking to traders and they are always sharing what they are up to with me.  This past week I had a trader who did their first trade using UVXY Weekly options this past week and I got permission to share their experience.  They (I’m going gender neutral to protect identity) started the week on Monday morning by initiating a pretty interesting trade.  The thinking was we may get a volatility spike by the end of the short week and they wanted long exposure to UVXY.  About 30 minutes into the day on Monday UVXY was trading at 23.20.  After exploring several alternatives they settled on selling a UVXY Mar 24th 22.00 / 24.00 Put Spread, selling the 24.00 Put at 1.73 and buying the 22.00 Put for 0.66 taking in a credit of 1.07.  Some of those proceeds we used to purchase two UVXY Mar 24th Calls at 0.35 each.  The result was a net credit of 0.37 for the whole spread.  By the end of the day UVXY was over a point lower and the 26 Call was being offered at 0.19.  The trader decided that they couldn’t pass up this bargain and purchased a third UVXY Mar 24th 26 Call for 0.19.  The net running credit for this trade was reduced to 0.18 and if held through Thursday’s closing a payoff that looks like the diagram below.


This trade looked awful until Thursday morning.  Thursday we call came into work with the equity market looking lower and UVXY looking higher, the fund opened well over 25.00 and the trader took some quick action off the open.  They sold two of their UVXY 26 Calls for 0.45 each and then, in what was probably the smartest (or luckiest) move of the week purchased their short position in the UVXY 24 Put back for 0.15.  I say lucky because as the equity market put up an end of day rally UVXY closed at 23.33 (check) which would have placed the short put 0.67 in the money and resulted in assignment if the position was not closed out.

So how did they do?

On Monday after all was said and done a credit of 0.18 was taken in.  Thursday we get to add 0.78 to the pot for a total credit of 0.96 before subtracting for commissions.  There were two remaining option positions open on the close Thursday, long the 22 Put and long one 26 Call, but of which expired with no value.  The results of this trade was not exactly the right side of the payoff diagram and probably not worth all the effort.  What we do have is a great example of dynamically trading around spreads and taking advantage of the price behavior of UVXY which can and does pretty dramatically over short periods of time.  Let's hope they come back for more so I have more to write about...