The S&P 500 rose slightly last week and the VIX curve was dramatically unchanged. Unchanged is an exaggeration, but in the four years that I have been posting blogs about VIX, this is the smallest week over week change I can remember.
Something I have been watching for some time is the futures pricing relative to spot VIX the Friday before settlement. The spread, when very little is going on, is usually about a point of premium in the soon to expire VIX future relative to the index. As noted above, the August VIX futures settlement was well over a point higher than VIX on Friday. This means if VIX does not move at all between Friday’s close and Wednesday settlement (I know, a reality stretch, but work with me here), a short position in the future would result in a profit. This trade can also be done through purchasing VIX put options as VIX option pricing reflects the level of the underlying futures contacts. I decided to take a look at several August VIX Put option prices from the close on Friday.
The pricing above is the offer price at the end of the day Friday, along with a break even at expiration level, and finally the difference between the break-even level and where VIX closed Friday. As an example the VIX Aug 17 Put was offered at 2.90. Purchasing this option with the intent of holding it to expiration would mean that august VIX settlement would need to be under 14.10 for this trading to make money. The payoff with Friday’s VIX close and the August futures settlement levels.
Note the payoff at expiration in the diagram above results in a profit as long as VIX remains around current levels into Wednesday settlement. This is common when expiration is approaching, which is currently once a month. However, beginning in early October, CBOE will begin offering VIX options that expire every week. I’ll be watching closely to see if this sort of price behavior is as consistent with Weeklys as it has been with standard VIX futures and options.