VIX moved up to a much greater extent than the front month futures this past week. This is a direct function of the extra risk premium that was priced into near dated VIX futures going into the always treacherous week with the Wednesday ADP number and official unemployment reading that comes out before the equity market opened on Friday.
This is not the first time I have pointed this out, but it is definitely worth noting. Check the curve and specifically take a look at April which appears to be quite an outlier. I’m still scratching my head over the extra risk that the market seems to be pricing in for next month. A VIX option trade that I came across late Friday seems to agree with the thesis that is being displayed by the VIX term structure curve.
With about 2 ½ hours left to go in the trading week, someone came in with an outlook that appears to expect a high, but not too high VIX in the middle of April. The common trade for this sort of outlook is an iron condor and that’s what I came across. Here are the specific legs of the trade –
Buy VIX Apr 14 Put at 0.20
Sell VIX Apr 16 Put at 0.90
Sell VIX Apr 20 Call at 1.35
Buy VIX Apr 22 Call at 1.02
When all was said and done the result was a net credit (before commissions) of 1.03 with a potential loss of 0.97. The full breakdown at expiration appears in the payoff diagram below.
The full profit is realized with April VIX settlement coming in between 16.00 and 20.00 with the break even points at 14.97 and 21.03. This is pretty neutral with respect to where the April future closed on Friday, but fairly bullish on VIX over the next few weeks. I did find it interesting that the trade was put on after the employment number came out and volatility had moved higher.