The S&P 500 was up over 1% and both spot VIX and VIX futures suffered the consequences. Spot VIX lost almost 12% and the August future was down about 6% last week.
VIX Weeklys futures were launched a couple of weeks ago and the first short dated contract expires this coming Wednesday on the open. I decided it was time for a quick look at how the nearest term contract has been tracking along with VIX. Day by day changes won’t tell us much so I sent my very competent summer intern down to the trading floor to gather intraday data for both VIX and the Aug 5th VIX Futures contract. The result is the chart below which shows VIX index prices every 15 minutes along with the midpoint of the bid – ask spread for the Aug 5th Future.
The correlation between price changes for spot VIX and the short dated future came to just over 0.87 using the full seven day life of the futures and the close every 15 minutes during the day. Another thing to note is the VIX future closed at a little less than a one point premium to VIX yesterday. This is very similar to the recent price behavior of traditional VIX futures on the Friday before settlement week. As we get more observations for the new futures, I’m planning on seeing how similar the last few days into settlement are for those contracts compared to what has been normal for the old school monthly VIX futures.
On Monday VIX finished the day at 15.60 and the front month August VIX future finished at 15.78. As the close approached an interesting trade was executed in the VIX pit. There was a seller of 513 VIX Aug 15 Puts at 1.00 who also purchased 513 VIX Aug 15 Calls for 1.90. The quick readers will note this is the equivalent of being long 51.3 August VIX Futures based on the 10 to 1 relationship between the two. The trade did have another leg to it as 950 of the VIX Aug 16 Calls were sold for 1.59. The net result of all this buying and selling was a credit (sans commissions) of $104,880. The payoff diagram below is based on the dollar profit and loss if the trade is held to expiration.
The significant price levels for this trade are very close to 12.95 and 16.35. Near both of those levels this trade goes from being a profit to a trade to be concerned about. Remember this trade was executed on Monday and since then VIX has returned to the pre-teen levels finishing the week at 12.12. If this trade is to be successful a bump to the upside is going to be needed. I bet the trader behind this execution is hoping for less than bullish (for the equity market) employment report this coming Friday or some other negative (but not too negative) event in the next couple of weeks.