Back in the day, when I was a lad in Junior High School, the Dead Kennedys remade the theme to the TV show Rawhide. The song begins, “Rollin’ rollin’ rollin’”, which is the ear worm I get when I see a trade like we had in the VIX pit today. Specifically, an October spread that got put on in July was rolled out to December.
The first part of the story begins on Friday July 21st when a trader initiated a spread that sold 1 VIX Oct 12 Put for 0.75, purchased 1 VIX Oct 15 Call for 1.45, and the sold 2 VIX Oct 25 Calls for 0.45 each for a net credit of 0.20. This spread was traded a little over 260,000 times (260,000 of the 12 Puts and 15 Calls and 520,000 of the 25 Calls). The payout if held to October expiration appears below.
So today, the trader rolled this position from October to December. They bought the VIX Oct 12 Puts for 0.87, sold the VIX Oct 15 Calls at 0.63, and then covered the VIX Oct 25 Calls for 0.15 each. Exiting the October position cost 0.54 per spread. The December position was initiated in the same contracts with 1 VIX Dec 12 Put being sold for 0.80, 1 VIX Dec 15 Call purchased for 1.80, and 2 VIX Dec 25 Calls sold for 0.67 each for a net credit of 0.34. Combining the October and December legs resulted in a cost of 0.20, which is equal to the credit taken in back in July. The payoff below shows how this trade would work at different levels upon December expiration.
Note the second payoff diagram is very similar to the first, but shifted down a little bit. Odds are the trader behind this transaction would either take some profits on a volatility spike or hold if they truly believe a higher VIX settlement is expected in December. The third alternative might be rolling to a farther expiration when December expiration approaches which will result in a little more of the Dead Kennedys ringing in my ears.