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?

  • $\begingroup$ Name your top three considerations for why this might be and someone will help you work through it. $\endgroup$ – James Spencer-Lavan Dec 17 '18 at 6:12

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.

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