I’m on the road today playing an academic, but regardless of how far I am from CBOE I still am fortunate that I’m constantly keep in the loop about big trades.  I got a heads up this morning that a VIX Mar 15 – 22 1 x 4 Call spread traded in the VIX pit a few minutes after the open.  My assumption was the trader bought the 15’s and sold the 22’s (I was wrong) mainly because all the big trades seem to be based on a low volatility outlook.  Also, my incorrect assumption was based on the March VIX call option skew which appears below.  Note I highlighted the two options involved in this trade with the implied volatility of the 15 calls at around 90 and the 22 call IV at 125. 

VIX Skew

As I mentioned my assumption was wrong and the specific trade involved selling 15,000 VIX Mar 15 Call at 0.74 and buying 60,000 VIX Mar 22 Calls at 0.24 each for a net cost of 0.22 per 1 x 4  spread.  This trade was executed when VIX was at 12.10 and the March contract was at 13.00. 

At expiration, this trade would not make money unless VIX settlement comes in around 24.40, but these types of trades are usually implemented with the intent of trading out of them on any sort of volatility spike.  I usually state that without including an example of what I’m talking about.  Today that comes to an end with the payoff diagram below.


Note I highlight the price of the March contract when the trade was executed, but neglect to include VIX.  That’s because the best pricing vehicle for the March options is the corresponding future and the curved line on the payoff diagram is priced off a futures price assumption.  The specific assumptions behind the half way to expiration line is 10 trading days to expiration and no change in each VIX option IV (unrealistic, but probably understanding the real profit).  Note on a volatility spike the break-even for this trade is closer to 20.00 and when the at expiration trade breaks even, this trade would have an unrealized profit of 5.50.