Thursday, September 9, 2010

VXX - How the Options Market Isn't Buying the Rally

VXX (VIX Short-Term Futures) is trading $18.72, with IV30™ down 3.5% to 66.32. The LIVEVOL™ Pro Summary is below.

So the market is up, vol is down and VXX is super down over the last few months from 31.66 down to 18 (ish). The Charts Tab for the recent few months is included (click to enlarge).

During this same time period, the market hasn't been ripping, it's just been bouncing. I've included the S&P 500 chart for the last few months, note the horizontal line on top illustrating where the market has bounced back down off of cyclical highs.

So vol has declined in a period where the market has muddled around, it has not been a matter of a market headed straight up. The question isn't so much where we've been, but of course, where we're going. Let's look at the VXX Skew on 7-21-2010. It's just a random date I chose over the last few months, but it's pretty representative of the skew shape over this time frame (click to enlarge).

The skew looked quite flat, indicating an option market implication of lessened tail risk. And, as we have seen, this implication was correct over the short term. Now let's take a look at the VXX skew as of yesterday (click to enlarge).

We can see now that the VXX skew is pronounced and steep relative to the mid summer. A part of the muted skew in July was the summer doldrums, where vol often drops. The point now is that as the market is reaching it's cyclical/technical highs, this time, the VXX skew is pricing substantive tail risk. In other words, the option market isn't buying the recovery relative to summer. Hmm...

Note also, the overall level of IV30™ for the VXX is 65.62. For perspective, the 52 wk range is [55.91, 93.11]. So, while skew is expensive, vol is relatively cheap.

This is trade analysis, not a recommendation.

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  1. Ophir,

    If you would play VXX, what would you do to go long (given the skew)?

    A calendar spread, sell Sep buy Oct?

  2. If I were to do something with VXX, I would try to make use of the lower ATM vol (relative to the rest of this year) and the higher skew (relative to summer). In other words, buy ATM sell wings on some ratio, maybe 1:1, maybe not). I'm sorry I can't really go any further, advice is not permitted. Good luck!

  3. See also...