Saturday Review for January 15, 2022

U.S. stocks were quiet and mixed last week with the Nasdaq-100 (NDX) the only winner among the three major indices gaining at whopping 0.12%. The S&P 500 (SPX) was down 0.30% and Russell 2000 (RUT) lost 0.80%.  The respective volatility indices were also mixed but not in direct relation to their corresponding market’s performance. That is VIX rose with the S&P 500 moving lower, but VOLQ rose with NDX higher and RVX dropped as the Russell 2000 moved lower.

I would not read too much into NDX-VOLQ and RUT-RVX moving in sync with each other. VOLQ has a seasonal impact of earnings announcements which gives it a tail wind with earnings from several large NDX components reporting over the next couple of weeks. RVX has been elevated relative to VIX for some time and the weakness in RVX may just represent narrowing of that spread.

The week started off with a fairly large NDX bull put spread implemented during the first hour of trading on Monday. This position resulted in about 2400 contracts. In several lots the NDX Jan 24^th 13675 Puts were sold at an average price of 28.58 and the same number of NDX Jan 24^th 13600 Puts were purchased for 26.21. The result was a credit of 2.37 a spread. The underlying NDX market ranged from 15295 to 15325 when this trade was executed. The outcome using 15295 as the market when the trade was executed appears below.

This trade realizes the max profit of 2.37 as long as NDX is over 13675 on the Monday Jan 24 close. This is a buffer of about 10.6% over 10 trading days (I include the execution day since the trade was put on in the first hour of Jan 10). I decided to look into how often NDX has dropped 10.6% or more over 10 trading days. Looking at just over 5500 10-trading day periods going back to 2000, NDX dropped 10.6% or more 2.4% of the time, so this is anything but a riskless trade. However, there are now just 5 trading days until expiration and the odds of a 10.6% or greater drop is now a tad under 1%, a statistic that has one large trader enjoying the long weekend more than most.

As a follow up, last week I highlighted an XND collar that rolled the long put side of the spread. The initial trade sold 50 XND Jan 28th 172.50 Calls for 0.20 and purchased 50 XND Jan 28th 149.00 Puts for 0.35 for a cost of 0.15 when XND was trading at 164.36.  On Friday Jan 7, the long put leg (XND Jan 28th 149.00 Put) was sold for 1.34, netting a profit of 0.99 on the put leg. Upon exiting the Jan 28^th put they purchased 50 XND Feb 18th 143.00 Puts for 1.56, rolling out to a longer expiration and down to a lower strike.  As of this past Friday no changes have been made to this trade.

The VIX futures curve twisted a bit last week with spot VIX rising, but the futures dropping slightly. This is common, especially when an expiration date is approaching. However, spot VIX usually experiences a bit of a headwind going into a holiday weekend and the near dated futures do not experience the same slight down pressure. I’m not sure how much can be read into this other than VIX is holding up, despite the long weekend and a fairly quiet week over week performance in the S&P 500. This is likely just a function of the amount of uncertainty about the world in 2022.

The VIX indices also experienced a divergence in performance last week with the 9-day VIX and spot VIX rising with the longer dated indices dropping slightly. Looking farther out into 2022 it may just be that there is more concern about the first half of 2022 versus the second half. At least that’s what the one week change is saying, we’ll see if more flattening confirms this thought.

In VIX option trading there was a Monday trade combining a synthetic short position in VIX using the VIX Jan 23 Put and Call with 4 short VIX puts. With spot VIX at 22.80 (I’m using spot instead of the futures because expiration is next week), a trader sold the VIX Jan 23 Call for 2.25 and purchased the VIX Jan 23 Put for 2.50 with a net cost of 0.25 a spread. This equates to being short VIX at 22.75. The spread trade was completed with 4 VIX Jan 19 Puts sold for 0.41 each (1.64 per spread) which nets to a credit of 1.39 per spread and a payoff at January VIX expiration that shows up below.

Note there is a wide range of profitability for this trade, ranging from 17.20 to 24.39. The maximum potential profit occurs if January VIX settlement comes in at 19 resulting in a profit of 5.39.

In the RUT arena, an interesting trade hit the tape on Thursday that I plan on monitoring for the next couple of months. A trader purchased the RUT Mar 18^th 2300 Calls for 19.30 sold twice as many RUT Jan 21^st 2100 Puts for 2.75 each in conjunction with the call position. The net result was a cost of 13.85 per spread. The payoff on Jan 21 shows up below. Remember the long call position may still be open on this date if not sold so the payoff is not linear, but curved.

When I see a trade that combines a short dated short option position with a longer dated long option I assume the short option will be replaced over the life of the trade as more premium is sought out to pay for the long leg. The RUT Jan 21 options are AM settled so they will expire on the open this coming Friday.  I’ll be looking for a seller of more RUT puts to help pay for the long 2300 calls that have a couple more months before expiring.