Saturday Review For Feb 26, 2022

US holiday weeks have been nothing short of exciting in 2022. The holiday shortened MLK week witnessed a dramatic drop in US equity markets, while our President’s Day holiday appeared to be on the same track, but reversing quickly and pushing to higher levels to finish out the week. The chart below shows VIX over the course of last week. Where the invasion began should be simple to see on this chart, but I still highlight the move.

On a week over week basis stocks were higher and the associated volatility indices all moved lower. It is very hard for me to believe anyone would have guessed the following equity market results would have turned out this way if they had known ahead of time what would transpire in Ukraine last week.

Other than equities rising last week, the slight drop in VIX relative to RVX and VOLQ stands out a bit. I have always considered VIX a more global volatility measure and it usually rises more than the other measures of expected volatility when uncertainty is global in nature. I think that’s why VIX was very close to unchanged on the week, dropping less than 1%. Some volatility traders believe it may not be the time to signal the all clear with respect to market uncertainty.

Looking at the VIX curve on a week over week basis does not tell a tale of war. In fact it looks more like a quiet summer weekly change. That is as long as we do not notice the VIX levels are in the upper 20’s and not the teens. The only hint of market concern is bacwardation from March out to June.

Sometimes the best trades are not necessarily the most exciting. Late Thursday, in the last minute of the day a sweep order came in buying over 1500 VIX Apr 20 Puts for 0.65 each. I’m not even going to guess what the markets will do over the next few weeks or even try to figure out how the Ukraine situation will resolve itself. However, I’ll assume this put buyer thinks major risks will be behind us in a few short weeks and VIX will return to the teens.

Another trader took the rebound on Thursday as a bullish signal putting on a bullish spread using Russell 2000 (RUT) options. The purchased the RUT Jun 2250 Calls for 24.60 and sold the RUT Jun 2300 Calls for 16.48 for a net cost of 8.12.

 

This trade is a low dollar risk, high dollar reward, but a lot has to go right for this trade to payoff. Specifically, a gain of over 15% as of the time the trade was executed. Friday’s price action cut that number down to 12.7% as the equity market finished the week with a very strong day.

Finally, the Nasdaq-100 finished the week with a 1.53% upside move on Friday. This one-day rise resulted in a positive week for NDX. One trader expects NDX to avoid a dip to lower levels next week and expressed this outlook using XND (1/100^th NDX) options. With XND at 141.48 the trade sold 30 XND Mar 4^th 139.50 Puts for 1.68 and bought 30 Mar 4^th 137.00 Puts for 1.07 resulting in a credit of 0.61 a spread.

This trade goes off the board next Friday and as long as XND is not lower by 1.4% the trade profit will equal that of the credit received at execution. The worst case scenario is a drop of 3.2% or more and aloss of 1.89 per spread.