This time last week we were all pretty certain that the final round of the French election was a done deal. Short term SPX implied volatility wasn’t taking any chances with VXST closing last Friday at 11.40. With the election outcome going as expected VXST got a little crushed and the shape of the VXST – VIX – VXV – VXMT curve moved back to contango.
Both the S&P 500 and VIX dropped last week, as the number of potential stock market land mines over the next few weeks (that we can see coming) is limited. VVIX inched up a bit as some traders took advantage of low VIX option IV to get long volatility exposure. SKEW moved lower which is interesting with VIX so close to 10.00. It may just be that no one is worried about a black swan any times soon, which of course by definition is when they happen. A glimmer of hope for the longer term VIX bulls shows up in the performance of VXZ which is based on owning a basket of August, September, October, and November VIX futures contracts.
Of great interest on the table below is the move higher in both VXAPL and VXIBM. Apparently, Warren Buffett has been adding to his AAPL position and scaling back his IBM holdings which may have sparked option trading after last weekend’s Berkshire get together in Omaha. Apparently the call buying was aggressive enough in the AAPL arena that the skew for AAPL options was higher on the call side than the put side to start last week. VXMT moved higher, which mirrors the move in VXZ above, which may make one wonder if the market is focusing on the fourth quarter of 2017 as the latest at which we will expect lower stock prices.
For the mean time, long volatility continues to take it on the chin as both VXX and UVXY moved lower. SVXY benefits from what is bad for the long funds and now is up almost 70% for 2017.
I went searching the ETP option world for a very bullish trade to discuss this weekend. When things are so quiet as represented by VIX, but at the same time there seem to be multiple geopolitical situations that could erupt at any moment some traders will be looking for a cheap method to be on the right side of a volatility spike. UVXY call options are a great place to find such a trade and I didn’t have to look to hard to find a good one.
On Friday afternoon with UVXY around 12.55 a trader purchased the UVXY Jun 9th 12.50 Calls for 1.26 and then sold the UVXY Jun 9th 21.00 Calls at 0.31 for a net cost of 0.95. The payoff at Jun 9th expiration shows up below, although a quick volatility event would probably result in our trader monetizing some profits.