The VIX curve moved from flat to backwardation as the S&P 500 dropped almost 5% to begin the year.  We finished the previous week with the curve pretty flat which is often considered an indication of uncertainty among volatility traders.  As a stretch of a visual I think about a flat volatility curve replicating a ‘fair coin’ which is the proper academic way to introduce a true 50 / 50 prospect.  That coin toss turned out to be extremely bearish for the equity markets this past week.

VIX Curve + Table

The short term VIX curve is often very flat since the near dated VIX futures tend to follow the performance of spot VIX fairly closely.  That has been the case except when we get a spike in volatility like last week.  Just like the more established VIX curve above, the short dated futures are in backwardation.

VIX ST Curve + Table

We have short dated futures on VIX and short dated options as well.  Both have caught on very quickly, and the trade from this past week uses two of those expiration series to create a VIX put calendar spread.  The biggest block trade on Friday involved a seller of the VIX Jan 27th 16 Puts at 0.11 who the purchased the same number of VIX Feb 3rd 16 Puts for 0.18.  A payoff diagram is tough for this trade since both options have different underlying pricing instruments.  My thinking is the trader expects one of two things.  Either they expected the Feb 3rd contract to maintain enough value at Jan 27th expiration so this trade turns a small profit or they are trying to thread the needle expecting Jan 27th VIX settlement over 16.00 and Feb 3rd VIX settlement below 16.00.  In this case I am leaning more to the first thought than the second though.