Last week VIX gained over 50% for the first time since August last year.  We all know most of this came Friday with the S&P 500 losing just over 2% on the day.  The obituaries being written about VIX after a historically tame year last year may have been a bit premature. 

VIX Fut 02022018

Friday was a huge day for VIX option trading as volume records were smashed.  At the end of the day over 4.3 million contracts had changed hands in the VIX pit.  Of course a good portion of Friday’s volume came from the roll of a very large spread trade that has been occupying the pits attention since July last year.  I’m going to summarize the history on this one as briefly as possible.  But there are lots of moving parts so pay close attention. 

The first part of the story begins on Friday July 21st when a trade was initiated 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). 

Part two occurred on September 25th when the trade was rolled 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.

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 fourth part of this trade occurred on January 10th when 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 February 14th.  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 had increased to 0.50 summing all the debits and credits together over all transactions

Now we get to this past Friday for what is part five.  This trade was rolled from February to March expiration, but unlike the past rolling transactions, a credit was received as opposed to a debit being paid out.  The closing trades for the February leg involved buying back the Feb 12 Put for 0.35, covering two Feb 25 Calls for 0.29 each and selling the Feb 15 Call for 1.31 which nets out to a credit of 0.38.  The Mar 12 Put was sold at 0.76, two Mar 25 Calls sold for 0.62 each and then a Mar 15 Call purchased for 1.83 resulting in a credit of 0.17 on the March leg of this trade.  The net result is a credit of 0.55 which offsets the running cost of 0.50 associated with the previous transactions and a payoff at March expiration that looks like the diagram below.

VIX PO 02022018

So that’s the full story and of course if the trade is exited, expires, or rolled we will update the status in this space.