The S&P 500 (SPX) rose 0.03% last week and could have just as easily been in the red for the week. VIX did achieve a 13-handle for a short period of time on Thursday, but gave that up as the stock market rebounded, but also felt a bit of drag due to the three-day weekend we are all enjoying. The Nasdaq-100 (NDX) was the big winner, rising 1.41% mainly due to NVDIA (NVDA) earnings which pushed the chip giant and de facto magnificent one stock (come on, the other six are up an average 10.76% in 2024 versus 114.90% for NVDA. It has been a while since we had a weekly change for the VIX term structure that looks like a single line on the graph, but that’s what we got last week. SPX volatility was low, there’s no news on the horizon (next week) and we have a holiday weekend. All contributed to very little going on last week for VIX. VIX ETPs almost all performed as expected with one exception, but there’s a reason. The short funds that focus on the near dated futures (SVXY & SVIX) were higher, based on VIX drifting slightly lower and the roll yield associated with short funds. All long funds lost value as did ZIVB, which was lower as well. That drop was based on the fund going x-dividend (0.485) on Wednesday. Without the dividend-based price reduction ZIVB gained 0.16% last week. The VSTOXX term structure was slightly more active than VIX with the spot index rising a bit, but there is very little light between the two curves. On Friday, one of my favorite trade structures for volatility index options was executed in the VSTOXX complex. With the Jun VSTOXX Future at 13.70 a trader sold 1000 Jun 13 Puts for 0.50, purchased the Jun 18 Call for 0.325, and finished the trade by selling the VSTOXX Jun 25 Call for 0.10. All these trades result in a credit of 0.275 per spread and potential payoffs that appear below. Note this trade is a small winner if VSTOXX is over 13.00 at expiration. That’s not the goal, but that is a nice consolation prize. The goal is to benefit from a spike in volatility and take profits. The payoff diagram includes assumptions around pricing on each Friday up to expiration. A VSTOXX move to 20.00 would result in a profit of over 2.00 points for each date above. VSTOXX at 25.00 would offer profits between about 4.10 and 7.275 depending on the timing of the move. The quiet week was beneficial for most index option sellers as 1-day at-the-money (ATM) straddles overpriced the daily move more than not. Starting with SPX, the days that did not work were Thursday and Friday, which were also the most expensive straddles. NDX straddle pricing underestimated the subsequent move on Monday and Friday last week. Note the high premiums for the straddle that settled on Thursday. This was a direct function of NVDA reporting earnings Wednesday after the close. We may need to do some earnings work on NDX straddles on days were large components report earnings. Russell 2000 (RUT) straddle performance is why we used the phrase ‘most’ when describing last week’s performance. RUT straddles underpriced the subsequent move the last three days of the week and the losses were about 5.00 points greater than the gains on the two profitable days. Europe was even more generous than the US for index option sellers. The Euro Stoxx 50 only managed to surpass the straddle pricing on Tuesday. Three of the other four days had double digit results. Finally, we saved the best for last as DAX ATM straddles overpriced all five moves last week. VIX & VSTOXX Offering Cheap Tail Hedge Opportunities Saturday Review For Week Of May 20, 2024 - May 24, 2024 RUSSELL RHOADS, PHD, CFA MAY 25 © 2024 Russell Rhoads
fwiw, buy vix calls when it is below 12, sell 11.5 puts when vix is elevated, pocket changes but always works. bought some last friday at 1.67 if i remember correctly.