The Friday to Friday change in the VIX term structure was as orderly as I’ve seen it in some time.
VIX has had a lower average daily close during a quarter only once, the fourth quarter of 2006. However, the low to high range for VIX has never been tighter than what we experienced in the first quarter of 2017 with the range of 2.54. On average the range of closing VIX prices is about 10.60 so the VIX market may be a bit wound up to the point where a big move to the upside is coming sooner rather than later.
Another factor that is looming over the volatility space is the pending election process beginning later this month in France. The curve below shows spot VSTOXX and associated futures pricing. Note the shape is not normal with the April contract as an outlier. VSTOXX and VIX usually move in line with each other, but the futures pricing of each market indicates a divergence is on the horizon. Either VSTOXX pulls VIX higher or VIX is the leader and VSTOXX moves lower over the next few weeks.
It may seem like a long time ago, but VIX came close to a 15 handle early Monday before backing off and returning to normal levels for 2017. There were contrasting trades early Monday, one fading the move and one looking for some follow through to higher levels for VIX. Let’s look at the fade trade first.
With VIX around 14.80 and the April futures around 14.60 (yes backwardation!) there were a seller of the VIX Apr 14 Calls at 1.54 who purchased the Apr 21 Calls for 0.46 and a net credit of 1.08. The payoff at April expiration appears below.
The bullish VIX trade occurred when spot VIX and the April contracts were at similar levels. This trader bought the VIX Apr 15 Calls at 1.29 and sold the Apr 20 Calls for 0.52 and a net cost of 0.77. That payout appears below.
So far so good for the fade trade, as spot VIX and the April contract finished the week much lower than where it started, however there’s still time to go for the bullish trade.