Why Short-Dated VXX Put Prices Can Change with Volatility Expectations

Summary

The document compares prices of VXX puts with similar strike, underlying price, and time to expiration, then asks why the later contract is markedly cheaper. The response points to changing expectations for near-term volatility of volatility: the volatility product’s level can remain similar while traders expect it to fluctuate less over the option’s remaining life. Event-heavy weeks may support higher short-term volatility pricing than a quieter holiday period.

The explanation separates the volatility represented by VXX from the volatility of that volatility, which affects a short-dated VXX option. It uses a simplified description of VIX as a two-month volatility measure and notes that VXX is an exchange-traded note with time decay and exposure tied to futures. Those simplifications limit the account; it offers no option-pricing model, full decomposition of the price change, or evidence isolating the effect of calendar events from other market factors.

Key ideas

• Similar VXX levels and expiries do not guarantee similar put prices.
• Short-dated VXX options reflect expectations about changes in volatility, including volatility of volatility.
• A quieter expected week can reduce near-term implied volatility even if the underlying volatility level is little changed.
• The explanation simplifies VIX exposure and notes that VXX has futures-related exposure and time decay.
• The document does not quantify how much of the observed price difference each factor explains.

Tags

# VXX Put pricing


# VXX Put pricing












Last week at Friday's close, the Dec 14 37.5 Put options were selling for \$.68 with VXX at \$40.29. This week at Friday's close, the Dec 21 37.5 Put options were selling for \$.38 with VXX at \$40.50. Almost the same exact amount of time to expiration and VXX was at almost the exact same price, yet the puts are selling for over 40% less! Why is this so?

## Answer by Lliane (score 1)

https://quant.stackexchange.com/a/43099

Last week (9-14) there were FOMC/ECB/BOJ decisions, this week (17-21) it's almost Christmas and traders care more about getting dinner reservations and buying turkeys than options, it makes sense to pay a bit less for very short term implied volatility of volatility than last week.

Let's simplify (a lot) and assume that the VIX is 2 months volatility spot (it's actually a weighted average of 2 futures so it's a forward vol + your ETN has time decay). Anyway, let's label it `2M VOL(SP500)`. Your 1 week VXX option is dependent on the implied volatility of volatility. Let's label it `1W VOL(2M VOL(SP500))`

The fact that your `2M VOL(SP500)` (much longer term compared to your 1 week option) is unchanged doesn't mean that `1W VOL(2M VOL(SP500))` is unchanged. Traders assume that the `2M VOL(SP500)` is going to be less volatile (which doesn't mean lower) this week than what they expected the previous week.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.