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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: , , , , , , .

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 :
:

As VIX Futures Expire, VXX Spike Risk is High

Posted by Scott Murray on July 16, 2013
Posted in: Uncategorized. Tagged: , , , , , , , , , .

For the first time in a month, and not every month offers this particular structure, the VXX is spring-loaded to the upside and not susceptible to significant daily drops. This condition will last for about two weeks. There are a few reasons for this:

A. The VIX is nearer the lower levels of the year, and the upside is far greater than  the downside. It is far easier for the VIX to jump 20% than for it to fall 20%. The VIX is also rolling into September already, which holds its value longer due to the month’s horrible market history.

B. The VXX is holding all of the same month of VIX futures, August. Because it does not hold a significant percentage of the month farther out at higher prices, it is less buffered to VIX spikes. Also, the new September futures rolled into will hold their value due to aforementioned September history.

C. The VIX futures expiration cycle is one week longer. This will reduce the rate of decay of the front month premium.

D. The spread of August to VIX spot contracted to 1.80 today. That is only 4 cents of daily premium to spot decay for the VXX if the VIX remains at 14.6. And this is only at the outset, as it rolls into September this number could fall.

E. The negative roll is lower rolling into September than it was rolling into August. It is currently 5 cents per day.

This VXX chart should be a loud hint toward what can happen around this time in the cycle, and I just described why the odds are even more tilted in the VXX’s favor:

vxx716

The futures:

Symbol Contract Month Time Last Change Open High Low
VX N3-CF S&P 500 VOLATILITY July2013 16:39:45 14.25 0.20 14.00 14.60 13.90
VX Q3-CF S&P 500 VOLATILITY August2013 16:39:45 16.20 0.45 15.75 16.39 15.65
VX U3-CF S&P 500 VOLATILITY September2013 16:39:45 17.45 0.50 16.90 17.57 16.79

The VIX term structure of option prices (not futures, S&P options vol):

VIX Volatility Index values generated at:  07/16/2013 13:18:24

Trade Date Expiration Date VIX Contract Month
7/16/2013 1:18:24 PM
17-Aug-13
 14.26 1
7/16/2013 1:18:24 PM
21-Sep-13
 15.17 2
7/16/2013 1:18:24 PM
19-Oct-13
 15.91 3

The VIX is rolling into September, so it will have a tough time falling. The two most probable scenarios for the VXX right now are higher and flat for a significant stretch. And you saw today what a meager 6 point S&P drop did to the VIX, moving it higher by 5%.

I sold the July 26th 17.5/16 VXX put spread for .60, which means no blood until 16.90 on the VXX next Friday. I will use any dip to add other put spreads preferably at 17 or 16.50. It should be clear by this strategy that I am not looking for a VXX spike. I am merely recognizing that the odds are stacked against the VXX’s frequent drops. Flat to up on the VXX makes this a winner. Asymmetric risk/reward.

Meanwhile, I also sold a July 19th IYT $115/117 call spread for $.67. Late July and early August have demonstrated challenges to the market historically, and after a 5% run in the S&P in July alone, and an 8% straight move higher since June 24th, I don’t mind setting spreads higher than current prices, forcing the market to prove it during and after earnings season.

I’m still bearish on oil at the highs; 40 cent moves in gasoline tend to get political attention, and this one already has. This is 20 cents behind the RBOB contract due to a time lag from refiner to pump:gasoline713

Senators Grill Refiners Over High Prices Amid Oil Boom

http://www.bloomberg.com/news/2013-07-16/senators-grill-refiners-over-high-prices-amid-oil-boom.html

Long UCO August $31 and $32 puts and long USO Aug $35.5 puts. May sell weeklies against the USO Aug on Thursday. Short UCO July 19th $35/37 call spreads that will roll if necessary.

Still short SPY $167-169 and $168-170 call spreads for July 19th from last week as well. Will roll out and up if necessary.