Yesterday VIX finished the day at 12.40 which is the lowest close since late January. The June VIX futures dropped 0.40 to 13.65 and the July contract closed at 14.50, down 0.25 on the day. With VIX at the lowest levels since before the market action in early February, we actually saw some bullish VIX spread trades come into the pit at the Cboe Options Market.

Trade 1 –

Fifteen minutes into the day VIX was at 12.59 and the June future at 13.90. There was a buyer of 4500 VIX Jun 14 Calls for 0.99 who sold the VIX Jun 17 Calls at 0.42 paying 0.57 for a call spread that is three points wide. This sort of trade is usually monetized if there is a move up in volatility, but for illustration sake I’m showing the payoff at June 20th AM settlement.

VIX PO 1

If held through expiration the best case scenario is a June VIX settlement at 17.00 or higher which results in the maximum potential profit of 2.43. The worst case is a settlement under 14.00 which could result in a loss of 0.57. The break-even at expiration on this trade is 14.57 and up to 17.00 partial profits could be realized.

Trade 2 –

A common bullish volatility trade involves selling a put and buying a call spread. Just after 11:00 Chicago time a trader used that structure with July VIX options. With VIX at 13.15 and the July futures at 14.55 there was a seller of 20,800 VIX Jul 13 Puts at 0.67 who then purchased 20,800 Jul 17 Calls for 1.13 and finished the trade with a sale of the VIX Jul 25 Calls for 0.43. The net result of all this is a cost of 0.03 and a payoff at expiration that looks like the diagram below.

VIX PO 2

A July VIX settlement between 13.00 and 17.00  results in this trade losing the initial cost of 0.03 at expiration. There is downside risk on this trade due to the short put, which theoretically is limited to a loss of 13.03. On the upside there are partial profits for this trade between 17.03 and 25.00 with the maximum potential profit capped at 7.97 with a VIX settlement of 25.00 or higher.

Trade 3 –

Finally, when VIX was quoted at 13.28 and the July futures were trading at 14.80 there was a buyer of 17,000 VIX Jul 15 Calls for 1.61 who sold the same number of Jul 29 Calls for 0.26 resulting in a net cost of 1.35. The outcome for this trade at expiration appears below.

VIX PO 3
Again, a move to the upside in VIX and the July future could result in some profits being taken before expiration. The break-even point for this trade at July settlement is 16.35 with potential profits above that level. However, at July settlement under 15.00 the result would be the maximum potential loss of 1.35 while a settlement over 29.00 would result in a maximum potential profit of 12.65.