VIX rose over 20% last week and the futures curve followed, but not nearly to the extent as the spot index. The November contract goes off the board on the open Wednesday finishing the week at only a 0.31 premium to the spot index. Usually the December contract is conspicuously low relative to spot VIX at this time of year as no one is concerned about the holidays and there are a few extra non-trading days associated with VIX around December expiration. However, the over 2 point premium relative to VIX indicates traders are still concerned some of the S&P 500 gains from 2017 may not hold up through the end of the year.
The rise is VIX was the 3rd largest week over week gain this year. I did some digging into the numbers as I thought it may be a bit overdone with the S&P 500 only dropping 0.21% for the week. This led to the table below. In mid-August we got over a 50% move out of VIX based on a 1.43% drop in the S&P 500. This is pretty reasonable, considering the low level of VIX going into that week. I started to notice that the week after these VIX spikes were followed by the S&P 500 rebounding. It’s no secret that buying on weakness has worked well in 2017. However, the only week on the table below that buying the S&P 500 on weakness (or a VIX spike) didn’t work was in August. The other eight weeks saw at minimum small gains and even some solid weeks following a higher VIX and lower S&P 500. Finally, it is worth noting, that 8 out of 9 weekly gains (88%) is a bit better than the norm in 2017 as we have had 30 weekly gains out of 44 observations in 2017 (68%).
Finally, there’s a trade I want to point out that doesn’t get a payoff diagram (too many moving parts). Both legs of this spread were initiated with VIX Weeklys which is a good demonstration of how far that part of the VIX option market has developed. On Friday there was a spread selling 4100 VIX Dec 13th 16 Calls at 0.65 and buying 4100 VIX Dec 13th 17 Calls at 0.55 who then also bought 50,898 VIX Nov 22nd 20 Calls at 0.15. This is all kinds of imbalanced so I’ll highlight the net cost. For the call spread this trade generated a credit of $41,000 with $763,470 being spent on the November 22nd Calls for a net cost of $722,470. The goal appears to be a spike in volatility before Thanksgiving and then a calming of the waters afterward and with Weeklys this trader has the ability to be very precise in their outlook.