S&P 500 implied volatility was dramatically lower last week. Of significance is VXV which hit 2017 lows. I’m teamed up with an academic putting the final touches on a study showing that VXV leads VIX so this may be a signal that the low for VIX in 2017 hasn’t be established and a close below 10.00 is a distinct possibility.
Beyond the long ETPs on the table, which had a pretty tough week, are some other markets worth noting. First, TYVIX, which was over 6.00 for the first time in a while finished the week down almost 26%. SKEW gained, but don’t take that as an increase in tail risk as this would be expected with volatility moving lower across the board. Finally, VVIX under 80.00 is possibly the most relatively complacent of the indexes quoted below.
SVXY approached all-time highs and is now up almost 60% for the year. VXX and UVXY got hit on the move lower in the VIX complex. I discuss a long SVXY trade that worked out well based on last week’s action at the end of this blog. Do keep in mind that the second round of the French election is this coming weekend, there’s not a lot of uncertainty priced in, but if Le Pen makes a run in the polls we may have another opportunity in volatility trading brought to us by the French election process. After that our attention will turn to London with elections being held in early June.
I need to double check with our volatility historian (who is actually me and I just don’t have time this weekend to confirm what I’m about to say) but I believe this is the first time since including this table in this blog that all volatility indexes were down on the week.
There are many ways to play a volatility crush like we saw last week. One is to get long exposure to SVXY. With a couple of hours to go in the trading day on Friday April 21st SVXY was around 127.50. At that time, a trader purchased the SVXY Apr 28th 142 Calls for 0.68 and then sold the SVXY Apr 28th 150 Calls for 0.18 and a net cost of 0.50. A payoff based on this past Friday’s close appears below.
I did a little more work on this trade. First, I took a look at how often SVXY has rallied enough in a single week to hit or exceed the long strike (150) in this call spread. To hit 150, SVXY would needed to have gained about 17.6% last week. SVXY has been around for 128 weeks and one 3 times a one week rally of 17.6% or greater has occurred.
If held to expiration, the result would be a profit of 2.51 (0.50 cost – 142 Call 3.01 in the money on Friday’s close). Personally, I would have taken this trade off early so I checked the profit based on each day’s closing prices for the two option in this trade. Monday, on the close, a profit of 2.77 could have been realized, Tuesday 3.87, Wednesday 3.10, and Thursday 3.13. Any way you slice it, this trader did a good job anticipating the subsequent drop in S&P 500 volatility that we witnessed last week.