EQD Research

Saturday Review For Mar 19, 2022

Mar 19, 2022

By Russell Rhoads,
head of research

Last week was huge for stocks and a bear for volatility. We made it through the Fed meeting unscathed and confident in our central bank’s ability to manage the economy. Of course, time will tell, but for the moment, it seems to be all good. Finally, the situation in Ukraine is still fluid, but the markets appear to be shaking this off as well.

Week Over Week Performance

The three US focused volatility indices all started the week over 30 and ended the week under that figure. Much was said in the financial twitter space about solid performance from the S&P 500 when VIX moves under 30 after spending a few days over the level. On Friday the Russell 2000 Volatility Index (RVX) closed under 30 for the first time in 20 sessions. As displayed on the table below, this was the eighth longest over 30 streak for RVX on record.

RVX Over 30 Streaks / RUT Performance Post Streak

Also, note the historical performance numbers on the table. Based on history when RVX is over 30 for 15 consecutive or more trading sessions and then closes under 30, the subsequent Russell 2000 (RUT) performance has not been solid. If anything, it’s been pretty poor with the majority of 5, 10, and 20 trading day periods following RVX moving under 30 resulting in negative returns. The positive here, if you are bearish, RUT options just got cheaper.

The average 20 day move for RUT after the move under 30 is a drop of 3.32%. The closest options to the 20 day time frame are the standard RUT options that settle on the open on April 14 which is a Thursday due to the Good Friday holiday on April 15. One thought, if you believe in history repeating itself, is a bearish RUT spread. On Friday’s close RUT was at 2082, the closest strike price to a 3.32% drop is 2010, so a spread could start with selling the RUT Apr 14 2010 Put for 32.60 and then buying a RUT Apr 14 2080 Put for 55.50 resulting in a net cost of 22.90 and the payoff at expiration that appears below.

If that 3.32% drop is met or exceeded the result in a profit of 47.10 while the risk is the 22.90 cost of the spread. Depending on your confidence about this trade, that’s a pretty good risk / reward scenario.

The Nasdaq-100 had a stellar week, rising 8.41%, the biggest weekly gain since an 8.49% rise in March 2020, almost two years to the date. One trader in the NDX complex was targeting a big upside move and seemed to be very fixated on the 14100 level. The table below shows trades using three different expirations, but buying the 14000 Call and selling the 14100 Call. One trade was on Wednesday, after the fed, and the other two occurred during the trading day on Thursday. Finally, each trade was done in approximately the same size so it is not a stretch to say this is the same trader.

NDX 14000 / 14100 Bull Call Spreads

These trades are all on the right track, with the March 18 spread already realizing a maximum profit of 39.95 for the one day trade executed on Thursday. The other two look good and as long as NDX closes over 14100 on Monday and Wednesday next week this trader will be three for three.

The week over week VIX term structure showed a dramatic change, dropping from backwardation to pretty steep contango.

The steepness of the VIX curve is something we haven’t seen in a while, but do keep in mind April is a long expiration cycle which may be contribute to the elevated level of the new front month contract relative to spot VIX.

Finally, in the volatility space, the big news was Barclays suspending issuance of VXX shares. I thought some insight could be gained into how investors are taking this news by looking at volume numbers. Since last week was a Fed announcement week, I decided to dig into volume on Fed days relative to the 20-day average volume leading up to the Fed announcement.  This final chart is the result of that number crunching.

I also pulled numbers on UVXY, SVYX, and VIXY to see if volume had moved to any of those products. Based on this single observation versus all announcements going back to January 2021 shows that VXX volume was well below the 20-day moving average (77% below recent volume), but volume did not shift over to the other ETPs. My conclusion, suspension of VXX creation is bad for all these ETPs. Let’s hope this action by Barclays gets reversed sooner rather than later.