Nothing like a 3% drop to provide a year-end boost to VIX, especially when it appeared no one was expecting it. Last Friday we got through the employment report unscathed and the result was a VIX close under 12. The last potential big “known unknown” this year comes Wednesday afternoon with the FOMC announcement. As a friendly reminder, December VIX futures and options settle on the open Wednesday so any trades based on an FOMC announcement reaction should focus on January contracts.

The curve went from textbook contango to backwardation (when looking at the index and front two month futures). Do note that the farther dated contracts were up over 10% across the board last week. This shows there is a shift in longer term thinking about the health of the US equity markets. So far in 2014 the average closing price for VIX has been around 14. The farther part of the curve indicates the average in 2015 is expected to be higher than in 2014.

VIX Curve

On Wednesday this past week VIX was up 20% on the day rising from 15.35 to 18.53. The December future rose from 14.90 to close at 17.40 that day as well. Someone correctly decided that the upside move was not over and just a few minutes before the 3:15 closing time for VIX options they purchased several (in the 1000’s) VIX Dec 17 Calls at 1.60 and sold the same number of VIX Dec 18 Calls at 1.25 and a net cost of 0.35. With the December future finishing the week at 19.60 and the spot index at 21.08 so far this trade is looking pretty smart.