The 25% drop in VIX last week may seem extreme, but it isn’t even in the top 10 of weekly losses for VIX (it is 11th). The all-time record was the last week in June 2016 with a 42% week over week loss. Note the big drop in futures along with a return to contango.
And now a whale update. Before getting into this trade here’s a little background.
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 250,000 times (250,000 of the 12 Puts and 15 Calls and 500,000 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
On February 3rd we saw 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.
Trade number 6 occurred on February 6th when VIX spiked this trade was partially taken off with a buy 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 (250,000) the short VIX 25 Calls.
Finally, here’s the update. Friday March 9th there was a buyer of about 125,000 VIX Mar 25 Calls for 0.25. There is no way to be sure this was the original trade as the open interest is about 490,000 contracts, but the size being half that of what was remaining is suspect. Below is a summary of all these trades. I’ll keep watching to see if there’s another buyer of 125,000 VIX Mar 25 Calls between now and settlement on the 21st.
One other thing to note with respect to this trade. Regardless of who it was, the VIX pit was able to take the other side of this trade without moving the market. The time and sales diagram below highlights what I’m talking about.
The orange box highlights all the buys of the VIX Mar 25 Call as it was divided up in many pieces around the pit. Note the blue box where I highlight where the market was before the trade was executed (0.20 x 0.25). The bid-ask spread didn’t budge and the whole trade was executed on the ask. That’s a great testament to the liquidity provided by the VIX pit.