We got a pretty orderly shift down in the VIX curve last week as the market easily digested a rate hike by the FOMC. Also, the March premium to spot VIX at about 0.50 is pretty narrow, however the April premium remains a bit wide based on pending events in Europe.
We have been paying attention to the VSTOXX term structure due to market concerns about the pending French election. It appears the Dutch results pushed spot VSTOXX lower, in fact the reaction was the biggest one day percent drop in history, but April remains at elevated levels. Many volatility traders believe that, one way or another, the spread between April VSTOXX futures and April VIX futures will narrow.
As Fed day got started on Wednesday, many of the large trades were focusing on April expiration. However, there was on daring soul who got short VIX exposure using March options. With VIX at 12.20 and the March VIX futures at 12.60 there was a seller of the VIX Mar 12 Calls at 0.87 who purchased the VIX Mar 18 Calls for 0.14 and a net credit of 0.73. If March 22nd VIX settlement comes in under 12 the result is a profit equal to the credit of 0.73. Since both spot VIX and the March futures finished the week under 12 it appears this trader’s pre-Fed VIX fade is in good shape, at least for the moment.