The S&P 500 quietly rose just under 1% last week and VIX worked lower.  Across the board S&P 500 focused volatility indexes dropped with the possibility that any threat of increased volatility in the markets has been pushed out to 2016.  Of course back in August those same indexes dropped as the economic calendar was light and Labor Day was around the corner.  Note what happened on August 21st and August 24th when complacency started setting in.


On the table below note that SKEW remains high as does the VIX of VIX which can be taken as not everyone thinks the markets are done with volatility events in 2015.

VXX Table

In my search for a fun trade to discuss I decided to venture beyond VXX this week.  I scanned the trading activity on Friday for UVXY options.  The trade I came across looks to June of next year with a bearish outlook for UVXY.  Anyone that is familiar with VIX related funds knows the long ones tend to grind lower over time.  What I found was a buyer of the UVXY Jun 17th 20 Puts who then sold an equal number of the UVYX Jun 17th 15 Puts and UVYX Jun 17th 6 Puts.  This trade appears to be have been worked into over the course of the day Friday, but the biggest block involved buying the 20 Puts at 7.76, selling the 15 Puts for 4.42 and then selling the 6 Puts for 0.43 and a net cost of 2.91 per spread and a payoff in mid-June which shows up in the diagram below.


I’ll discuss the payoff at expiration and then my assumption behind how this trade may be handled.  First, this trade works if UVXY settles between down about 33% and 50% at June expiration.  That’s a wide berth, but not necessarily the plan.  I could see a trader taking profits on the short put positions in this spread the next time we have a volatility spike with the result being only the long put position remaining between now and June.