The S&P 500 lost about 0.3% last week and VIX rose.  I think the VIX to S&P 500 relationship is only part of the story related to VIX rising last week.  It appears the pending election process in France is starting to influence US volatility.  Note that April is a bit higher than May volatility in the orange circle on the chart below.  This is a fairly rare occurrence for the futures considering the current low level of VIX.  As long as there is a cloud of uncertainty hanging over Europe, we will probably see April futures maintain a relatively elevated price level compared to the May futures.

VIX Table Curve04072017

I’ve been focusing on the VSTOXX curve the past few weeks noting that the spot index continues to creep higher rising to the elevated levels of the April contract.  Last week spot VSTOXX was up just over 3 points while April VSTOXX gained just 0.40.  This is worth keeping an eye on as when we went through the Brexit process VIX may have been influenced by VSTOXX price action.  I noted this is a blog earlier this week - http://www.cboe.com/blogs/options-hub/2017/04/04/vix-vstoxx-and-the-french-election

VSTOXX Curve 472017

 

Mid-day with VIX around 12.90 there was a trader that executed the very popular short put plus long call spread.  Most of these trades have been focusing on April, but as standard April expiration approaches we are starting to see traders look to May.   This trade sold the VIX May 12 Puts for 0.40, purchased the VIX May 16 Calls for 1.05 and then finished up the trade by selling the VIX May 21 Calls for 0.53.  All this trading resulted in a cost of 0.12 and a payout that resembles the diagram below. 

VIX Payoff 04072017

I put two lines on this chart, one based on expiration and the other based on some assumptions that are based on being half way to expiration.  This is appropriate since exiting a trade on a volatility spike is usually part of the exit plan for a trade like this.  Lighter blue line is straight forward, while the dark blue payoff deserves some explanation. 

This trade was executed with 40 days remaining until May expiration so the curved line represents 20 days left to expiration.  A bump up across the board in implied volatility is assumed as well.  Note the break even for this trade is around 14.00 with 20 days to go, so it wouldn’t take much of a bump in VIX to get this trade into the green.  Finally, I know I focused on VIX, but before we get to expiration a better underlying would be the May futures contracts.