Since their launch just two months ago, options on the iPath S&P 500 VIX Short-Term Futures ETN (VXX) have attracted a robust following and have averaged about 20,000 contracts per day. During that period, approximately 2/3 of the VXX options transactions have involved calls.
Action in VXX options has heated up substantially in the past week, with record call volume last Tuesday and again today, as the Livevol chart below shows. Perhaps more importantly, call transactions as a percentage of all options transactions has spiked to a new all-time high of 78%, indicating that investors have become increasingly insistent that volatility is due for a rise.
So far at least, the VIX has refused to cooperate, closing today at 22.73, a 12-week low.
With VIX front month and second month futures settling at 25.55 and 28.75 today, respectively, the gap in the VIX futures used to calculate VXX has jumped to 3.20, reflecting a strong contango rip tide (the “headwind” metaphor has a vacation day today…) and substantial daily negative roll yield.
Looking at the chart, previous instances of VXX call spikes (green columns at bottom) have tended to coincide with tops in VXX. If the smart money is piling into long VXX calls this time around, it looks as if they are already underwater. With implied volatility just under 65, time decay is at least as much of a threat to long VXX calls as contango. The chart patterns have me wondering if there is a little desperation in the air that may be triggering some revenge trades in VXX.
As always, caveat emptor.
For more on related subjects, readers are encouraged to check out:
- Chart of the Week: VXX Options
- CBOE Launches Options on VXX and VXZ
- Chart of the Week: VXX Celebrates One Year of Futility
- Chart of the Week: VXX vs. VIX
- Why the VXX Is Not a Good Short-Term or Long-Term Play
- VXX Calculations, VIX Futures and Time Decay
Disclosure(s): neutral position on VXX via options at time of writing; Livevol is an advertiser on VIX and More