The stock market continues to be jittery with the S&P 500 dropping almost 3% last week. This price action resulted in a 25% move higher in VIX. I was in the classroom most of Friday so I wasn’t as focused as I would like to have been on the intraday price action. I was pretty surprised to see the February future settle at a premium to the index. With VIX over 20 we would expect at least a little backwardation. I could understand the shape of the curve below if February settlement were this coming week, but we’ve still got twelve more trading days until February VIX settlement is determined on the open on the 18th.
The classroom at the Options Institute is just a few feet away from the VIX pit. Despite the market sell off the VIX pit was pretty quiet for the majority of the trading day. The audible volume picked up in the last couple of hours with a spread trade that expects lower VIX in the next couple of weeks. With VIX around 20.50 there was a seller of 10,000 of the VIX Feb 19 – 22 Call Spreads who took in a credit of 0.96. The best case scenario is February VIX settlement below 19.00 which results in a profit equal to the credit taken in. On the other side of the coin, VIX over 22.00 will result in a loss of 2.04.