The month is setting up to be a mirror image of the last two. This is what bull markets look like, predictable. Everyone is a hero, because 8 or 9 days out of 10, the market is higher and days of higher prices are strung together. Next week sets up historically as very bullish, and as we pointed out yesterday, the VIX tends to fall next week.
That doesn’t mean it will happen, but we are ready to take advantage of the futures term structure. While we can hope for a down day in the market next week to aid our trade setup, we don’t need that to happen.
The futures held up fairly well today, against a falling VIX:
| VX H3-CF | S&P 500 VOLATILITY | March2013 | 15:53:02 | 13.90 | -0.30 | 14.10 | 14.55 | 13.85 |
| VX J3-CF | S&P 500 VOLATILITY | April2013 | 15:53:02 | 15.10 | -0.15 | 15.20 | 15.50 | 15.00 |
| VX K3-CF | S&P 500 VOLATILITY | May2013 | 15:53:04 | 16.05 | -0.05 | 16.05 | 16.27 | 15.88 |
| VX M3-CF | S&P 500 VOLATILITY | June2013 | 15:52:59 | 16.65 | -0.05 | 16.71 | 16.85 | 16.53 |
If you’re holding VIX options and futures right now, you are in prayer mode. You need help, and soon. The VIX fell faster than the futures again today, setting up more pain ahead if the market doesn’t pause. Even if the market pauses, the futures and the VIX can both drop, so the market will need to be jostled to save futures and option holders above 14.
The VIX March puts are still in denial, as they are trading below intrinsic value. If the March VIX settles at its current price, these puts are going to be worth double their price today.
| 13.00 | VIX130320P00013000 | 0.25 |  Â 0.10 |
0.20 | 0.25 | 24,844 | 179,087 |
| 14.00 | VIX130320P00014000 | 0.75 | Â 0.12 |
0.70 | 0.80 | 35,885 | 159,991 |
| 15.00 | VIX130320P00015000 | 1.50 | Â 0.20 |
1.45 | 1.55 | 22,515 | 214,491 |
Trade/Action:
Next week we may be putting on a large VIX position, but it will depend on how the first 3 days of the week pan out, in both volatility and futures pricing. Stay tuned.
Still holding April $19 VXX puts. Oddly, these are not living up to their delta right now, and it is fascinating to watch because they become a better value every day. Today the VXX fell .32, and the .21 delta should have been .06 on these options. They only went up .02. This has been the case all week, and it is far too early to cite increasing theta. The roll toll alone hits the VXX by about 8 cents a day, so that negates any theta bleed.
What I’ve noticed is that spread sellers have been selling these while spreading VXX puts. That pushed down their implied volatility. Regardless, with the $20 puts sitting at .97, the $19’s could move significantly if the VXX takes a $1 leg down, which is very possible due to the futures curve in it’s current structure. We will look to add on spikes in vol.
Volatility Arbitrage:
HRB rocketed higher today, and our credit diagonal is going to need HRB to fall a couple percent next week for this trade to work. We have the option of closing the short leg and riding the long leg as well.
@VolatilityWiz
