EQD Research

Saturday Review For June 18, 2022

Jun 18, 2022

By Russell Rhoads,
head of research

Last week was another tough one for stocks with U.S. small caps leading the move lower as the Russell 2000 gave up 7.5%. The Nasdaq-100 and S&P 500 both lost significant ground as well. The volatility indices reacted by gaining ground and VIX closed the week above 30.00, a round number many market observers like to keep an eye on.

The past two weeks the S&P 500 gave up over 5%. Despite a significant drop in the S&P 500, VIX has not reacted with the sort of fear that many traders would expect. We decided to look at the closing VIX level on weeks where the S&P 500 lost 5% or more. The table below shows the average, high, and low VIX closes based on significant drops in the S&P 500 going back to the first week of 2000.

There have been ten weeks were the S&P 500 lost between 5% and 6%, including the two most recent weeks, and the average VIX close during those ten observations is 29.04, lower than I believe many people would guess (including the author). The point behind this exercise is that VIX around 30 in the current market environment is more normal than many people think.

In the VIX ETP space, the long funds all did well and short funds gave up more ground. Nothing on the table below is out of the realm of expectations.

A couple of months ago two new VIX related ETPs launched (SVIX and UVIX) so we decided to look at AUM and trading activity for the whole VIX ETP space. The table below shows the AUM as of the end of last week along with average ETP and option volume.

UVXY is the leading ETP when looking at AUM, ETP volume, and option volume. Note that VIXY, which offers the same exposure to VIX futures as VXX, had almost three times the volume for VXX last week, despite putting up much lower option volume. The two new funds, UVIX and SVIX, both continue to attract assets. They also are putting up very nice ETP volume despite only standard third Friday options currently the only option expirations available for trading. Many market participants are looking forward to weekly expirations on both.

Turning to the VIX term structure, we are now in the most defined backwardation since early May. Despite VIX being at historically high levels, contango has been dominating the end of week term structure for several weeks.

This past week we were able to pick up on a round trip vertical spread using XND options (reminder – XND is 1/100th the size of NDX). Early Monday, with XND at 115.27 a trader, expecting further downside for the Nasdaq-100, sold 100 XND Jun 17 114 Calls for 3.32 and purchased 100 XND Jun 17 117 Calls for 1.73 taking in a credit of 1.59. The trade was closed out on Wednesday, but for reference sake the payoff, if held to expiration, appears below.

This trade had a potential reward of 1.59 if XND was below 114.00 at expiration and risk of 1.41 with XND over 117.00 at expiration. The 117.00 price level may have been a stop for this trade as late Wednesday as the markets rallied in response to the Fed announcement this trade was closed out with the short 114 Call covered at 3.88 and long 117 Call sold for 1.88 netting a cost of 2.00. The result was a loss of 0.41 and probably a little regret since the Nasdaq-100 turned around on Thursday with a big downside move.

Late Tuesday, as VIX remained at elevated levels following Monday’s price action, a trader put on a 1 x 2 put spread using July options. With the July VIX at 31.95 this trader purchased 1 VIX Jul 32.50 Put for 4.65 and sold 2 VIX Jul 27.00 Puts for 1.45 each resulting in a cost of 1.75 per spread. The payout at July VIX settlement appears below.


This trade has a very wide range of profitability with the most risk occurring if VIX nosedives to the low twenty’s or high teens. Between 23.25 and 30.75 this trade make some profit with a maximum return if July standard VIX settlement hits 27.00.

Finally, late Friday several NDX 1 x 2 call spreads hit the tape late in the day. We will highlight one in this space, but plan on diving deeper into these trades early next week. One example involves NDX at 11265 and a trader buying 1 NDX Jun 24 13400 Call for 1.10 and selling 2 NDX Jun 24 13850 Calls for 0.55 each resulting in a trade executed for 0.00 (excluding commissions).

At expiration, a lot has to go right for this trade to make a profit with break-even at expiration falling between up 18.9% and 26.9%. However, a strong move from NDX early in the week may push the 13400 call up more than the 13850 call creating an opportunity to sell the long call or even exit the whole spread at a profit.