VIX-VXO Spread Widens OEX-SPX 1-5 Swap Executed

This morning, the VXO was at the lowest levels in months. At the same time the VIX was not doing much. I looked at the spread between the two and realized it was the widest it had been since January. Let’s recall that even in early January the IV levels of the indexes were higher. I stated over the weekend that percentage changes of the VIX and VXO does not matter. This is true; the percentage change in the indexes does not matter. However, when correlated indexes have lower volatility, the spread between their implied volatilities should also be tighter. I thought, he I haven’t done a dispersion trade in a while, why not now.

Thus I decided to try a 1-5 swap. A 1-5 swap is not 1 SPX for 5 OEX contracts. It stands for S&P 100 (OEX) swapped for S&P 500 (SPX). In actuality it’s about 2.2 to 1. I decided I would rather be long a little premium than short so I put the spread on 2 by 5. I sold 2 SP.X straddle @ 55.00 and I bought 5 OEX straddles for 25.10. My hope is the OEX will break out and the SPX will not break out as hard. This actually makes some sense, especially if something happens in Greece, or with the economy.

Here are the spreads:

The 5 OEX Straddles

The 2 SPX Straddles

I’ll keep everyone informed of this swap over the next few days along with my regular posts.

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