For the past few months writing this weekend review has been a difficult task. How many different ways can I say VIX is low and reflecting low realized volatility in the S&P 500? The past couple of weeks it has suddenly gotten much easier to talk about VIX.
Last week was the first one week drop of greater than 5% since early January 2016. The weakness actually began two weeks ago and the S&P 500 has given up 8.8% in the past two weeks is the biggest two week drop since August 2011. The result is VIX doing what it does in times of uncertainty, move up and move up quickly.
VIX was up about 68% last week and the front month February future gained almost 74%. VIX settlement for February occurs this coming Wednesday morning and time running out on the futures provided a little extra boost. We moved from slight backwardation to substantial backwardation pretty quickly.
Last week I provided an update on a large VIX trade that has been rolled a few times since being initiated last July. The table below summarizes the initial trade, rolling transaction, and what appears to be a partial exit this past week. The trade size is approximately selling 250,000 12 Puts, buying 250,000 15 Calls, and selling 500,000 25 Calls.
As of February 2nd the trade had been rolled four times which, excluding commissions, had resulted in a credit of 0.05 per spread. The position at this time was short 1 VIX Mar 12 Put, long 1 VIX Mar 15 Call, and short 2 VIX Mar 25 Calls. The payout, if held to expiration, looks like the diagram below. Note there’s risk with VIX under 12.00 or greater than 35.00.
This past week there was a buyer of the VIX Mar 12 Puts, selling the VIX Mar 15 Calls, and buying the VIX Mar 25 Call. This spread was executed about 250,000 times generating a credit of 3.00 and appears to represent exiting all but half the short VIX 25 Calls. This alters the risk / reward a bit with the at expiration payout that looks like the diagram below. To give a bit of perspective I included the closing prices for the March futures and spot VIX on this payout.
This trader had been position for a volatility spike since July. They rolled multiple times, sometimes at a cost, and once for a credit. At the worst the rolling transactions had resulted in a net debit of 0.50. We will keep an eye on the VIX Mar 25 Calls for another sell in the 250,000 contract range, but this trade may be content to let the clock run out on the final part of this trade depending on how VIX and the March VIX futures behave over the next few weeks.