The shift for the VXST – VIX – VXV – VXMT curve was dramatic, but sort of what we have become use to in this buy on the dip culture. VIX finished the week under 16.00, which voids a prediction that I had for the rest of the year. I felt concerns about a December rate hike and the impact on stocks into 2016 would keep VIX elevated for the final few weeks of the year.
VXX and the other long funds came under pressure based on the drop in VIX and VIX futures last week. The leveraged funds also got hit pretty hard as would be expected. What stands out to me below is that VVIX remains pretty high despite the drop in VIX last week. Demand has remained high reflecting demand for out of the money VIX calls.
On Friday one of the biggest VXX option trades seems to have a two-step mentality behind it. In order for the trade to be successful VXX needs to run to the 30’s in the beginning of 2016. The trade is a VXX calendar spread selling VXX Dec 18th 30 Calls for 0.21 and buying VXX Jan 15th 30 Calls for 0.56 and a net cost of 0.35. The payout diagram below is based on pricing at the market close on December 18th.
Note how much VXX can ‘over shoot’ 30.00 and the trade still results in a profit. However, I think the trader would be much happier if VXX runs up after December 18th but before January 15th as shown in the diagram below. Assuming VXX finishes under 30.00 on December 18th and the short leg of this calendar spread expires out of the money, here’s the payoff for the long VXX Jan 15th 30 Calls at expiration.