VIX gained and the futures curve dropped a bit last week. This is not totally out of the norm, but before a holiday weekend is something I cannot recall occurring in my years of watching VIX price action.

VIX Table Curve

Wednesday last week was the second busiest day on record in the VIX option arena.  A good portion of this can be attributed to one very large position being rolled from January to February VIX contracts.  It turns out this has been an ongoing saga starting back in the summer.  Here’s the full story of this short 1 VIX 12 Put, long 1 VIX 15 Call, short 2 VIX 25 Calls spread trade.   

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.


On September 25th 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.  A 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 so at this point the running trade was done for no cost.  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. 

A third rolling transaction occurred on December 1st last year with the trade being rolled from December to January.  The VIX Dec 12 Puts were purchased for 0.90 and two Dec 25 Calls purchased for 0.20 each while the VIX Dec 15 Calls were sold for 0.90.  This leg results in a cost of 0.40 to exit.  The VIX Jan 12 Puts were sold for 0.70, VIX Jan 15 Calls purchased for 1.50 and then finally two VIX Jan 25 Calls sold for 0.50 each.  The January leg generated a credit of 0.20 so the third rolling transaction cost 0.20 which is at this time was the running cost for this trade.  The payoff diagram below takes into account the running cost of rolling this trade since inception in July.


This payoff diagram is very similar to the first two, but has shifted down a little bit with a loss of 0.20 at expiration. 

Now we get to this week.  This past Wednesday this trade was rolled out to February.  The VIX Jan 12 Puts were purchased for 1.53, the VIX Jan 15 Call sold for 0.12 and finally the two VIX Jan 25 calls purchased for 0.04 with a net cost of 1.49 to exit the January part of the trade.  The rolling trade moved exposure to February contracts which expire on Valentine’s Day (early reminder guys).  The VIX Feb 12 Puts were sold for 1.38, the VIX Feb 15 Calls were purchased for 0.73 and then finally two VIX Feb 25 Calls were sold for 0.27 each.  This part of the trade generated a credit of 1.19 resulting in a cost of 0.30 per spread for this roll.  This means the net running cost for this trade is now 0.50 and a payout at February expiration that looks like the diagram below. 


This trade is looking for some sort of volatility event with a potential trade occurring to take profits if we get the long overdue spike.  As always if something happens worth talking about we will report back in this space.