Finally, the Fed raised rates.  I’m reading Ben Bernanke’s book and it is interesting that this was being debated when he was still the chairman.  The equity market loved it and then hated it with the result being a roller coaster of a week.  The VXST – VIX – VXV – VXMT curve was on heightened alert this time last week and returned to normal to end the week.  It is rare, but we seem to have experienced an earnings like volatility crush in SPX volatility in reaction to the Fed announcement.


Despite all that volatility last week the short funds were up (SVXY +4.52%) and the long funds dropped.  This is a function of VIX futures finishing the week lower and these funds now moving on to own January and February VIX futures.

VXV Table

On Tuesday I was looking for trades in front of the Fed and came across a couple that actually were looking for volatility to remain high to finish the week.  The trades I’m going to talk about are both 2500 lots so I’m guessing it is the same guy or girl on the other end.  Early Tuesday with VXX at 20.85 there was a seller of VXX Dec 18th 20 Puts at 0.63 who purchased the VXX Dec 18th 19 Puts for 0.27 and a net credit of 0.36.  VXX went up and then came back down and near the end of the day another trade in the same options of the same size took in a credit of 0.41.  The price action for the full week in VXX shows up below.

VXX Chart

About 24 hours after the second lot the Fed did its thing and VXX dropped as the stock market rallied.  VXX did bottom out for the week and finished at 21.77, safely in a place where all options expired with no value.



It is no secret that I am a big fan of vertical spreads.  This week’s trade is a great example of how defined risk and reward that is associated with a bull put spread makes it easy for a trader to stick with a conviction.  A player long VXX, with no hedge, may have panicked as VXX broke 19.00.  A seller of a put spread may not be particularly happy, but they have a defined loss and it is easier to stick this out.