VIX was higher last week, despite the S&P 500 hitting a record high for five days in a row.  At low levels this sort of divergence between VIX and the S&P 500 isn’t usually much of a big deal.  But I wonder if there may be more significance since VIX under 10 has become a bit more of a norm. 

VIX Curve 10202017

I love going through time and sale to see what sort of trading has been going on in VIX options and it’s a bonus when I find a trade structure that’s uncommon.  This leads me to this week’s trade which combined a synthetic long VIX position with a long VIX put.  On Thursday, there was a buyer of the VIX Oct 25th 12 Calls at 0.36 who sold the VIX Oct 25th 12 Puts at 1.52 which is a synthetic long position in VIX with a price of 10.84.  Since it’s VIX we can think of it as a synthetic long Oct 25th VIX Futures position (it appears the Oct 25th VIX futures were trading at 10.85 at the time).  To round out the trade they purchased the VIX Oct 25th 11.50 Puts for 1.09.  The results a payoff that looks like the diagram on expiration date. 

VIX PO 10202017

If the chart above looks familiar it is because it is a long call.   With three legs a trader basically replicated a long 11.50 Call at a cost of 0.43.   The market for those options was 0.45 x 0.50 at the time of the trade so they did a little bit better by executing the spread as opposed to buying the call options.