Last week VIX did what I guess it is supposed to do and moved to very low levels to reflect that we are in the summer doldrums. VIX dropped in a way it usually rallies and was down 29% last week for the third biggest one week drop since 1990. VXST was down over 43% as the curve went quickly from slight backwardation to contango.
The long ETP’s got slapped around a bit with VXX losing 17% and the leveraged funds giving up about 33%. The inverse funds moved higher, but only by about 20% as that nasty daily performance resulted in a smaller gain than loss for the long funds.
On Thursday, VIX dropped below 12 for the third time this year. The last two times this happened the S&P 500 was down tremendously the next day. Now that Friday is behind us we know that the streak of big drops after VIX has an 11 handle on the day ended at 2 (is 2 actually a streak?). I did go searching for a trade using VIX ETPs that was hoping for a rally, which would be expected if the S&P 500 dropped quickly. Instead I came across a trade using UVXY options that had only one day remaining to expiration and worked if the fund dropped a little or gained a lot. With UVXY at 28.37 there was a buyer of the UVXY Jul 17th 29.50 Puts at 1.61 who also purchased the UVXY Jul 17th 34.50 Calls at 0.06 for a net cost of 1.67.
This trader needed UVXY to drop 1.7% from where the fund was when they put on the trade or rally 29.6% just to break even. They also only had one day for this price action to occur in UVXY. We know the S&P 500 was relatively quiet on Friday and the result was UVXY finishing the day at 27.52 which placed the 29.50 Puts solidly 1.98 in the money.