The S&P 500 took a dive last week in what turned out to be the second worst weekly performance of 2015.  As of Friday the S&P 500 is down 1.7% for the year which would be the first noticeable loss (2011 was down less than 0.01%) since 2008.  The four volatility indexes that use S&P 500 as the underlying all shot higher.  What stands out to me is the high levels for VXV (3-month) and VXMT (6-month) on the chart below.  We are in the midst of high SPX implied volatility and the market expects this to continue into 2016.


All things VIX and VIX related rose last week with a couple of exceptions.  Of course the short funds were lower and TYVIX also lost a little value last week.  UVXY put up an exceptional week, rising about 45%, which is expected in such situations.  Those long funds get all kinds of flak until we have a week like last week and then you have traders wishing they had owned the funds.

VXX Table

In the middle of the afternoon on Friday, as VIX was flirting with 20 and UVXY was just over 35 (35.02) a trade came to the UVXY option market that is look for UVXY to give up the tremendous gains (and then some) realized last week.  The time frame for this trade goes out to just before the official start of summer, or June 17, 2016.  The specific trade was a buyer of the UVXY Jun 2016 25 Puts for 9.67 who sold the UVXY Jun 2016 20 Puts for 6.34 and a net cost of 3.33.  A payoff diagram for this long term bearish UVXY trade shows up below.


The break-even level for this trade is 21.67 or 42% below Friday’s closing price of 37.41 (note UVXY rallied 2.39 after the trade was initiated).  A full profit will be realized if the trade is held to expiration and UVXY is under 20.00 at the close on June 17th of next year.  This involves a drop of about 47%, which is a distinct possibility in the world of leveraged volatility oriented exchange traded products.