EQD Research

Saturday Review For Jan 29, 2022

Jan 29, 2022

By Russell Rhoads,
head of research

I’ve always claimed volatility traders are a smart bunch, but before the last couple of years the collective would give into fear when VIX and VIX futures reacted to a stock market sell-off in what I term a volatility event. The chart below shows the net speculative VIX future positions according to the CFTC’s weekly Commitment of Traders (COT) report over the period covering the pandemic era for the market.

The lower the line, the more short speculative traders with VIX futures positions. Historically this figure is well below 0%. However, historically during spikes in volatility the figure would shift to positive (or net long). The next chart shows the reaction to Volmageddon in February 2018.

This 2018 chart was the last time this reading moved over 0% which indicates more long than short speculative positions in VIX futures. The first chart shows that after a few instances of VIX running up and short volatility players stepping away at possibly the very worst time to abandon short volatility strategies, they are now sticking with short strategies.

We first noticed that VIX traders did not shift from short to long in March 2020, even with VIX reaching into the 80’s. Based on that observation, we reached out to a couple of short volatility fund managers and learned that not only had they planned on staying short through volatility events, but also have conditioned clients to add funds when VIX is at elevated levels. I guess it is not just the managers, but the clients who are also getting wiser with respect to how short volatility strategies work over time.

Last week was a rollercoaster ride that finished where it started. The S&P 500 (SPX) and Nasdaq-100 (NDX) were both higher, while the Russell 2000 (RUT) finished lower on the week. All three volatility indexes were at elevated levels going into the week and lost a little during a week where the big volatility occurred toward the beginning of the week.

VIX and the February future moved lower, with a bit of mixed performance farther out of the curve. Do note how flat the curve remains, a sign I have always equated with uncertainty, likely a theme that will persist in 2022.

With so much focus on the standard VIX expirations, traders sometime forget about the non-standard expirations. One trader felt the market action at the beginning of last week will subside by the middle of the coming week and used VIX options expiring on Feb 2 to express this outlook.

Late Monday, with spot VIX around 29.55, a trader sold the VIX Feb 2nd 30.00 Calls for 2.91 and purchased the VIX Feb 2nd 32.50 Calls for 2.41 and a net credit of 0.50. As long as VIX remains below 30.00 this trade is in safe territory.


VOLQ was the biggest mover to the downside among the three volatility indexes. This may be attributed to several big NDX components reporting earnings last week. The usage of XND (1/100th NDX) options continues to ramp up and two sizable trades with contrasting outlooks hit the tape early Monday within seconds of each other. The first trade is bearish and occurred with XND at 141.11. This trader is looking to next week selling the XND Feb 4th 141 Calls for 4.74 and buying the XND Feb 4th 147 Calls for 1.76. The net is a credit of 2.98 and a payoff at Friday expiration that appears below.


The second trade looks to February 11 expiration and is bullish. With XND at 141.34 a trader sold the XND Feb 11th 140.50 Puts for 5.22 and purchased the XND Feb 11th 130.50 Puts for 2.12 taking in a credit of 3.10.

Both XND trades have a distinct possibility of working out and we will keep an eye on the respective XND contracts for any managing trades.

Finally, small caps lagged a bit with RUT losing value last wee. That did not stop one trader from putting on a bullish trade using RUT options expiring on the standard March 18 expiration date.

With RUT at 1976 a trader sold over 3000 of the RUT Mar 18th 2050 Puts for 133.52 who then purchased the RUT Mar 18th 1850 Puts for 53.92. This trade took in a credit of 80.40 per spread.


The ultimate goal behind this trade is RUT over 2050 in mid-march, but partial profits may be realized between 1969.60 and 2050. A continued correction in small caps can result in losses of 119.60 if RUT is below 1850 at expiration.