VIX drifted to close under 12.00 for the first time since late August as the S&P 500 made more new highs. The leftover fear from the market’s dive in October seems to be gone just like all our Thanksgiving leftovers. At least one derivative strategist thinks lower VIX levels are on the near term horizon. Buzz Gregory from Goldman Sachs was featured in Barron’s this weekend saying his models point to VIX around 10.60 before 2014 is done. The trades executed last week and discussed in a previous blog and at the end of this posting match up well with this forecast.
Despite the prediction of lower levels for VIX and the S&P 500 continuing to make new highs, the curve remains fairly steep. I checked the economic calendar and there does not appear to be any more major ‘known unknowns’ coming up before December expiration. Despite that the December contract, which usually has a bit of a headwind due to the seasonal holiday effect on VIX remains at a premium.
Early last week the discussion in the volatility world was all about a large VIX put buyer on Tuesday. Someone came in to the VIX market and purchased 175,000 VIX Dec 12.50 Puts for 0.13. This was mentioned in the Barron’s article referenced above and blogged about in this space as well. Since then another big put buyer showed up on Friday. There’s no way to know if it is the same player, but the numbers are kind of ironic. Someone purchased 175,000 VIX Dec 11.50 Puts for 0.05 just before lunchtime. The payoff diagram, if held to expiration, appears below.
I was on the road Friday and when I saw big volume in the VIX Dec 11.50 Puts my first thought was the buyer from earlier in the week was offsetting some of the cost of those 12.50’s and legging into a bear put spread. After making a couple of calls that did not appear to be the case and this trade was a customer buying the 11.50’s. VIX at 11.45 at expiration would result in break even, but VIX at 11.45 at expiration would result in a pretty nice payday for the buyer of the 12.50’s. If the open interest for both the 12.50's and 11.50's remains around current levels I will definitely be keeping a close eye on VIX settlement the morning of December 17th.