The S&P 500 rallied nicely to begin 2018 gaining 2.60% last week.  Those that predict 2018 will be a repeat of 2017 are feeling very smug this weekend, however, we have 51 weeks to go and time will tell.  SPX volatility did what it does and dropped with the strong stock market.

VXST VIX VIX3M VXMT 01052018

The long funds picked up where they left off having a pretty tough week and the short funds benefitted.  I special shout out to the short VSTOXX focused ETN (EXIV) which put up a 12.6% move this week.  I bet there are many equity portfolio managers who would be thrilled with a 12.6% year in 2018. 

VXX Table 010502018

There would be a lot more red on the table below if we weren’t moving into earning season soon.  Five of the ten volatility indexes that moved higher last week were based on individual stock option series. 

Vol Index Prices 01052018

Friday morning, with SVXY around 135.90 a trader purchased 200 SVXY Jan 12th 137 Calls for 2.17 and sold 400 SVXY Jan 12th 140 Calls at 0.77 each paying 0.63 for each spread.  The payoff on the close this coming Friday appears below.

SVXY PO 01052018

So this trade makes money if SVXY closes between 1.25% and 4.74% higher next week.  Knowing this I decided to run some numbers.  

We have 326 weekly observations for SVXY since the ETF was launched in 2010.   Of those weeks, SVXY has closed lower on a week over week basis 123 times or about 38% of observations, this outcome would result in a loss of 0.63.  On the other end of the spectrum SVXY has rallied more than 4.74% 106 times or about 33%.  This would result in some sort of loss, the biggest weekly gain for SVXY since the fund was launched was 22.7% (wow!) which would result in a loss of 24.41 per spread (wow again!).  Finally, this trade makes money in the 1.25% to 4.74% range which has been the weekly result for SVXY 74 times or about 23% of observations. 

There is no reason this trader has to hold through expiration and if SVXY trades up to the 137 price range I would not be surprised to see some sort of exit trade in this spread if SVXY moves to the long strike of 137.  I’ll be watching the 137 and 140 SVXY lines this week and if it appears profits (or losses) have been taken I’ll report back accordingly.