We got a parallel shift lower in the SPX term structure last week as the fed raised rates and lowered the risk of owning equities at the same time. I know the fed gets a lot of criticism, but hiking rates to slow the economy a bit without having a psychologically negative impact on the financial markets seems like a group doing a pretty good job to me.
The long volatility ETPs continue to have a tough 2017 while XIV and SVYX are putting up strong numbers. As would be expected TYVIX was lower last week as the next questionable rate decision is several months off. SKEW hit an all-time high on Friday which I will get into a little more toward the end of this blog.
As mentioned short volatility is the theme for 2017, at least for the first quarter of this year. Remember in 2016 that short volatility started out in the opposite direction so, even though the trend is your friend, in the volatility space trends often end quickly and violently.
The CBOE Skew index measures the relative price of low strike puts to near at the money puts on the S&P 500. A steeper term structure curve results in a higher the SKEW index. Friday’s close of 154.34 was the highest closing level for SKEW in the history of the index which goes back to 1990. This shows up on the very busy looking chart below.
SKEW is calculated starting with a ratio. This ratio consists of the numerator being lower strike SPX puts and the denominator being higher strike SPX puts. For instances if the IV of the lower strike puts is 30% and the higher strike puts is 20% then the first part of the calculation is 30/20 = 1.33. This figure is then multiplied by 100 to give us the SKEW index or 1.33 x 100 results in a SKEW of 133. There are two ways for SKEW to rise, either through a higher numerator or a lower denominator. High SKEW does indicate that out of the money puts are relatively expensive, but in a low volatility environment we may get excited about an all-time high, but keep that number in a bit of context.
Finally, an interesting and long term bearish VXX trade was executed in the VIX pit today at CBOE. Yes, you read that right, VXX options do trade in the same area as VIX at CBOE. With VXX at 15.72 there was a seller of 17,500 VXX Jun 16th 13 Puts for 0.54 who also purchased 17,500 VXX Jan 19th 2018 8 Puts for 0.36 and a net credit of 0.18. The payout below is based on little change in the IV of the long-dated puts at about 60% at June expiration.
If VXX is over 13.00 at June expiration then the short put expires with no value. The long Jan 2018 8 strike put position is still open. There are three basic alternatives at this point. First, the trader may just sell the put, if there is any premium available. Second, our trader may choose to sell another VXX put against the one they hold. Finally, they may just hold on to the long option if they believe volatility is going to stay low and VXX will continue to drift lower.