The Week in Volatility Indexes and ETPs – 2/23 – 2/27

Last week was fairly quiet despite the second revision of GDP coming in a little light. We may see a little more volatility action in the coming week as on Wednesday the ADP Employment Change report is released Wednesday before the open and then the government version of the employment report coming on Friday. Both of these reports are significant as they are a first look at economic activity for February.

Despite the S&P 500 losing a little value last week, with Friday to blame, the VXST – VIX – VXV – VXMT curve actually did shift lower. VXST broke 11 for the first time since Christmas Eve of last year. I find this a bit surprising due to the pending employment reports mentioned above.

As volatility settles in the low teens the long VIX strategy funds continue to struggle. VXX lost almost 5% for the week and is down over 12% year to date. Being short volatility is now working after struggling to start the year with both XIV and SVXY up about 5% for the year.

 I noted a few weeks ago a VXX buy-write on a Friday afternoon. I saw another one come in late Friday this week. There was a buyer of VXX at 27.60 who also sold the VXX Mar 6^th 28 Calls for 0.60. I never like to refer to a covered call as a hedge, but that may just be part of the motivation for this trade.  The payoff diagram below shows the break-even point in percentage terms which I’ll touch on below.

Selling the call option results in a 2% cushion against a downside move in VXX and giving up a big part of the upside. Of course VXX can lose much more in a week (last week it was down about 5%). However, it may be that the holder of this position would roll their option down at particular price points.  Conversely if VXX moves higher they may consider rolling up or just holding through expiration and having the shares called away for a profit of 1.00. I’m going to keep an eye on VXX and the Mar 6^th Calls to see if I can get a read on any managing trades around this buy-write.

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