and the VXX Goes down

The VXX gets smoked… and we told you so.

 For a while now we at Option Pit have been noticing the declines in the VIX even when the market has been falling on the vicious but brief selloffs of late.  That is a sign of volatility fatigue in the broader market and some acceptance that things might be looking brighter for equity prices.  With today as the last VIX settlement for 2011 I thought it was appropriate to mention the near collapse of the price in VXX (ETN that follows the two front month VIX futures) the end of the day.  What the heck happened?

Charts courtesy of Think or Swim (www.thinkorswim.com)

The VXX flirted with higher prices early in the day with weaker equity prices but was just a brief respite in the preceding route.  The VIX cash only tells part of the story here below.  No doubt the VIX cash came in as option volatility in the SPX declined.

Charts courtesy of the CBOE (www.cboe.com)

But what really got smoked was the VIX January contract (below).  Down a full $.26 past the decline in the VIX cash.  Paper hit the Jan future hard after expiration of the Dec contract.  There was no waiting around as expectations for volatility are pointing lower short term.  With the decline in the January VIX future the VXX ETN disintegrated on the close.  Might have been the massive infusion from the ECB?  Let the bank holidays begin a la the great Mr. Bernake.

The Trade

 Buying January Puts in the VXX in slightly OTM strikes makes sense.  If the Euro Crisis is truly over down goes the VXX and if it rears its ugly head we should see an uptick in the volatility of the volatility.

Table courtesy of the CFE (www.http://cfe.cboe.com/)

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