The S&P 500 lost 3.4% last week which I guess is becoming commonplace these days.  Do note on the curve below that VXST closed a tad lower on a week over week basis.  We attribute this to the long weekend we are currently experiencing and I’ll address that a little more in a minute.


Both VXST and VIX experience a little bit of a headwind going into long weekends.  This can be attributed to the calculations of both being based on calendar days and not trading days.  Therefore when the market is closed for three days the result is a slightly lower index than before a non-holiday weekend.  In the case of VXST this impact is more dramatic since it is a nine day volatility measure.  We have data going back to 2011 for VXST and of the 30 long weekends over this time period VXST has dropped 22 times on the Friday before, but risen 29 times on the day after the long weekend.  So based on history we have a 96.7% chance of VXST rising Monday.

The combination of the drop the in S&P 500 and move higher in VIX futures benefitted the heavily traded VXX last week which rose twice as much as VIX.  In addition to VIX futures gaining value last week, VXX benefitted from the continued state of backwardation between the September and October VIX futures contracts.  For those keeping score VIX month 1 – month 2 backwardation has been in place for 11 consecutive days.

VXX Table

Despite the state of backwardation, one trader did a pretty good job selling volatility on Wednesday this past week.  With VXX hovering around 30.00 there was a seller of the VXX Sep 4th 30.00 Calls at 1.18 who then got some protection from buying the VXX Sep 4th 31.50 Calls for 0.60 thus taking in a net credit of 0.58.  The goal here is VXX closing under 30.00 on Friday, which it did after making a few small moves over that key level during the trading day.  If the trader sweated it out and held to the close they were rewarded with a profit equal to the credit of 0.58.