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VIX Rejects 14 – Futures Spread Falls Before Slew of Economic Data

Posted by Scott Murray on July 30, 2013
Posted in: Uncategorized. Tagged: futures, oil, Options, scott murray, VIX, Volatility, VXX.

This is what August looked like last year. Let me refresh your memory as there was nothing to remember. (Is that a non-sequitur?) I only recall it because it was amazingly placid:

spyaug12a

The majority of August saw the S&P in a 20 point range. We started this trend early this year, two weeks into July:

spy730

The S&P has spent two weeks in a 20 point range. And the futures are expecting more of the same. Today the spread to spot VIX shrunk to .6 at one time today and sits currently at around .9. The futures are going to have to be dragged kicking and screaming higher. As the VIX eclipsed 14, they refused to move. Complacency is very high, even though there are 3 weeks until expiration of the front month:

Symbol Contract Month Time Last Change Open High Low
VX Q3-CF S&P 500 VOLATILITY August2013 16:43:36 14.30 -0.35 14.55 14.80 14.25
VX U3-CF S&P 500 VOLATILITY September2013 16:43:36 15.70 -0.25 15.85 16.05 15.60
VX V3-CF S&P 500 VOLATILITY October2013 16:43:36 16.70 -0.20 16.90 17.00 16.65

And all this quiet ahead of a lot of data. FED meeting, jobs, GDP, ISM. There is no fear. If this is how it’s going to be, I am certainly going to take advantage of it.

FAS butterfly for August 17th:

Long $71, short 2x $74, long $77. Net debit .62. The total risk is .62 and this can return $3 if the FAS closes at $74 on Aug. 17th. Nice 5-1 risk/reward for flat markets in the strongest of sectors these days.

VXX calendar at $16, Aug 2nd/Aug 9th.

Short VXX Aug 2nd for .15, long Aug 9th for .34, net debit .19. As I explained yesterday, it is really tough to lose here. The worst case scenario is the VIX drops to 12 this week and I sell out the long end for .15 or so. The futures are tight to spot with a ton of time to go. If by some miracle there is volatility in the next week, the return would be huge.

Oil got smoked today, but the worst may be yet to come. A build in inventories will do the trick, and the market hasn’t witnessed that in 5 weeks. Sold the USO puts today for 100% profit in 4 days. This trade is still incredibly crowded, as the long speculative contracts outweigh the shorts by over 11 to 1. The total spec longs is a record. Still short UCO (2x oil) puts at $34,33, 31.

Disaggregated Commitments of Traders-All Futures Combined Positions as of July 23, 2013              
:                                             Reportable Positions                                             :
:------------------------------------------------------------------------------------------------------------- :
: Producer/Merchant :                             :                             :                              :
:  Processor/User   :        Swap Dealers         :  Managed Money        :      Other Reportables       :
:   Long  :  Short  :   Long  :  Short  :Spreading:   Long  :  Short  :Spreading:   Long  :  Short  :Spreading :
----------------------------------------------------------------------------------------------------------------
CRUDE OIL, LIGHT SWEET - NEW YORK MERCANTILE EXCHANGE   (CONTRACTS OF 1,000 BARRELS)                           :
CFTC Code #067651                                                    Open Interest is 1,865,700                :
: Positions                                            LONG   SHORT                                                        :
:  375,919   333,517    98,616   513,433   225,699   335,934    30,090   317,115   140,127    84,905   276,572 :
:

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