While we expected a quiet week in the equity markets and a corresponding VIX that trended lower, this has exceeded even our expectations of pure quiet. We’ve seen total high/low spreads of 6-8 S&P points from top to bottom for 4 days essentially. This kind of action represents a VIX of under 8 on an annualized basis. Amazing.
The VIX is barely moving, and the VXX is holding up because the futures in April have a massive premium to spot, nearly 30%. I suspect that a considerable roll is occurring from March to April, and once everyone is in April, those front month futures will start to fall. This is all provided the VIX and the market remain quiet.
The VXX, therefore, is beholden to the April contract at this point, as the fund is holding only 4 days of March of 25 total this cycle. While the daily roll cost is something like this:
14.70-12.70 = 2 / 12.7 = 15.7% / 25 (days in the cycle this month) = .63% per day or 13 cents
Now, while I really hate to actually write the words forthcoming, it is becoming evident due to the price of the futures and the fund’s current holdings, that Â VXX options are almost a buy. Almost being the key word. If you eye the front month futures on Tuesday, and the April contracts fall 5% or so, then you are looking at a potential short-term opportunity to get long volatility.
Here is why. On Wednesday with the VXX you may be essentially holding options on April futures at a price of about $14. If you wanted to go buy the options on the VIX for April at $14, you are going to pay 1.50, or 11%. If you buy the VXX calls you will pay less than 10% at the money and you will get 3 more days of time, as they expire on the Friday after VIX expiration. Lots of IFs in there though.
|VX H3-CF||S&P 500 VOLATILITY||March2013||15:47:30||12.53||-0.42||12.85||12.93||12.50|
|VX J3-CF||S&P 500 VOLATILITY||April2013||15:47:30||14.53||-0.17||14.60||14.84||14.50|
|VX K3-CF||S&P 500 VOLATILITY||May2013||15:46:42||15.69||-0.16||15.75||15.95||15.64|
|View By Expiration:Â Mar 13Â |Â Apr 13Â |Â May 13Â |Â Jun 13Â |Â Jul 13Â |Â Aug 13
IF that trade materializes next week, we will tweet and post it. Otherwise, we already have long volatility positions by having bought calendars, so we are ready for volatility to sit here, or move higher, or do nothing. We have long vol, short vol, and decaying premium all on right now. See prior posts or performance tab to see the current positions.
No new positions. Long VIX calendars and VXX puts.
Closed HRB calendar spread for -.19 loss.
Quiet trade through Tuesday, then with the end of quarter in sight for PM’s, let’s see who locks in and calls it a quarter between now and March 31. Volatility will rise soon, maybe not next week, but soon.
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