We had two big trades come through the VIX pit today and about the only thing they have in common is that they both used March VIX options.
First, there was an out of the money bull call spread. With spot VIX around 22.60 there was a buyer of 80,000 VIX Mar 27 Calls at 1.95 who then sold 80,000 VIX Mar 35 Calls at 0.91 for a net cost of 1.04. A spike to just over 28.00 gets this trade to the point of profitability. This requires a closing high for 2016 in VIX since that current number for 2016 is 27.59. If the trader is nimble, they may find a good exit opportunity if the intraday high for VIX in 2016 (32.09) is tested between now and March settlement. Needless to say for this trade to pay off the equity market will need to take a dive from current levels and do it in a dramatic fashion.
What makes a market is people with different opinions and the second big trade from today has a different opinion from the first. With VIX at 23.68 a trader constructed an iron condor using March VIX options. They sold the VIX Mar 20 Puts at 1.40 and sold the VIX Mar 25 Calls at 2.62. The spread was completed when they purchased the VIX Mar 18 Puts at 0.57 and purchased the VIX Mar 27 Calls for 2.19 with the result being a credit of 1.26. The ultimate goal, if held to expiration, is for March VIX settlement to fall between 20 and 25. So far in 2016 we have only eighteen trading days behind us, six of those days VIX has closed over 25.00 and only once VIX has closed lower than 20.00 so for about 2/3rds of trading days we have seen a closing price that the seller of this spread would consider a good place to be.
One final note - I know I didn't include the March VIX futures in the payoff diagram, that's because spot VIX and the March contract are trading almost in line with each other at this time, but always be aware the better of the two to value VIX options is the corresponding VIX future and not spot VIX.