This has to confuse a lot of folks out there. There are times when you just don’t want to be long volatility, and frequently it is in front of a major market event, and at the end of an option cycle. The VIX futures had a solid spread to spot VIX to begin the day, and that did not change all day. Implied volatilities in S&P options heading into the Fed meeting was high enough in the July put options, that it was able to absorb a 23 point drop in the SPX without moving the VIX.
The VIX hilariously settled at 17.22 in the morning and promptly fell to under 15.50 by 2 pm. There are those that speculate that you can game the VIX settlement by buying a bunch of cheap OTM options on the SPX at the open, and today did nothing to dispel that possibility:
http://www.optionmonster.com/news/article.php?page=june_vix_contracts_settle_at_1722__82691.html
The VIX futures fell slightly today and maintain a sizeable spread to spot VIX:
| Symbol | Contract | Month | Time | Last | Change | Open | High | Low |
|---|---|---|---|---|---|---|---|---|
| VX M3-CF | S&P 500 VOLATILITY | June2013 | 16:38:09 | 16.80 | ||||
| VX N3-CF | S&P 500 VOLATILITY | July2013 | 16:14:08 | 17.55 | -0.10 | 17.70 | 17.85 | 16.75 |
| VX Q3-CF | S&P 500 VOLATILITY | August2013 | 16:14:10 | 18.30 | -0.05 | 18.39 | 18.53 | 17.50 |
Yields absolutely skyrocketed as Bernanke spoke, it was shocking to watch the 10 year treasury:
All of our diagonal call spreads are now winners, and provided there is no major bounce, they will give us free runners into next week where you can turn a .07 credit into a .50 cent sale. Amazing returns for very low risk. Same goes for our IWM 99/100 call diagonal, free runner for next week.
Our SPY put diagonal will need to be managed should we get a major sell-off over the next couple days, but a mild bounce will destroy a ton of premium in the short put with two days to expiration. A Friday close above 164 will give us another free runner.
The VXX is hanging precariously on a big spread to spot. If the market stabilizes and moves higher over the next few days, it has 5-10% of downside waiting to happen. It is now rolling into August 18.30 price futures. The curve from spot to futures is very steep. We entered the weekly $21 puts at 1.07 early in the day, and they actually went up in value today. I am looking closely at VXX puts for next week, the typical trough for volatility in the cycle.
Remember, this is far from a guarantee, but the tailwinds are there. If the market wants to crater after Bernanke essentially said nothing new, then anything can happen. The 50 day SMA is sitting at 162 on the SPY, only 1% lower, and that has been a money trade for how many months now? Folks will probably show up again and give it a try should we get there.
