VIX remains at low levels and the curve continues to be steep as the volatility markets appear to be braced for ‘something’.  That something is probably an unknown unknown that will shock some very complacent markets. 

VIX Curves 09292017

An interesting VIX trade caught my eye on Friday as it were a little different than most of the trades I’ve come across.  First the trade details and then a little color about that trade.  Friday morning, with VIX around 9.50, there was a buyer of about 16,000 VIX Oct 11th 21 Calls for 0.10 who sold about 8,000 VIX Nov 1st 16 Calls for 0.60 each.  This results in a net credit of 0.40 for each ratio diagonal spread.  Also, worth pointing out is that both legs are in VIX Weeklys and not standard expirations.  The payout scenarios are infinite so I’m just going to show a couple before expiration along with how things work out if all options expire with no value. 

In order to guesstimate (that’s the accurate word here) where this trade might be next Friday I have to assume how the October 11th and November 1st VIX curves would reaction to a move higher from VIX.  This first payoff diagram assumes a flattening of the curve if VIX moves up to 15 and then an inversion of the prices if VIX moves higher. 

VIX Curve Assumptions 09292017

Based on the curve assumptions above the profit or loss for this trade based on various VIX levels on Friday October 6th.  Note the unrealized P/L is negative anywhere from 10 up to the low 20’s.

VIX PO 1 09292017

The payout for October 11th settlement is my second guesstimate for the progression of this trade.  Once again, the short leg is holding up well which keeps this from being much of a profit unless we have a huge pop in volatility. 

VIX PO 2 09292017

Finally, I take things to November 1st expiration assuming that the long and short legs of this trade expire out of the money at the two expiration dates.  Basically, it is a picture of being short the Nov 1st 16 Calls at 0.40.  We have to guess the trader behind this spread is hoping to catch a small volatility spike, trade out of the long leg taking in some more premium and then hold into November 1st settlement with the expectation that the settlement print will come in below 16.00.  

VIX PO 3 09292017