The first chart in this blog is a bit out of place. I normally discuss the VXST – VIX – VXV – VXMT term structure in the space where we review volatility index and ETP trading. However, after I completed that blog I considered taking a look at where we closed Friday versus the average for 2014. On the short end VXST is only 0.07 higher than the average for 2014, but this can still be considered relatively high since we are moving into a holiday shortened week. Volatility indexes are calculated based on calendar days and when there are market holidays it creates some downside pressure. This pressure shows up even more in VXST since it is measuring eight day implied volatility.   The rest of the curve is pretty elevated relative to this past year which, if correct in the extra concern, may not be a good sign for stocks in the first half of 2015.

VXST - VIX - VXV - VXMT 2014 Comparison

The VIX curve returned to normal for the holidays as the S&P 500 rallied 3.41% last week. January is almost at parity with VIX which indicates no risk premium was being paid to for VIX futures sellers or that there is little expectation of VIX moving up from current levels over the near term. I know that directly contradicts the first paragraph in this blog, but the markets probably don’t expect much over the next couple of (holiday impacted) weeks.

VIX Curve

Wednesday was December VIX expiration so the focus is all on 2015. One trader is looking to a VIX settlement in the teens or lower come January 21st.   Just a few minutes after the open on Thursday, with VIX at 17.15 and the January VIX future around 17.65 there was a broken wing butterfly that caught my eye. A trader sold the VIX Jan 15 Put at 0.89 and sold the VIX Jan 15 Call for 2.89. They completed this spread through purchasing a VIX Jan 14 Put at 0.48 and VIX Jan 23 Call at 1.05. The result is the payoff that shows up below –


Note that January VIX settlement anywhere below 17.25 results in a profit for this trade, the perfect storm is VIX settlement at 15.00 and a profit of 2.25.   Any settlement below 14.00 results in a payout 1.25. The risk to this trade is a similar situation to December with January VIX settlement at 23.00 or higher. In this case this broken wing butterfly would result in a loss of 5.75.