June VIX settlement is on the horizon, just two trading days and an overnight to Wednesday’s AM settlement. I mention that as a lead off in this space as I find the June futures at a premium to spot VIX kind of interesting considering VIX rose 26% last week. Admittedly, a 0.50 premium isn’t all that much, but any premium at all makes me think traders are still on edge after the S&P 500 price action last week and now going into two weeks with big known unknowns (FOMC this week and Brexit the following week).
I’m going to deviate a bit from my normal pattern in this space and discuss the VIX of VIX (VVIX). As the name implies VVIX is a measure of the expected volatility of the 30-day forward price of VIX. VVIX finished last week at 103.78, closing over 100.00 for the first time since February.
To give a little perspective on VVIX I updated the chart below through Friday’s close. This shows the high – low range along with the yearly average for VVIX beginning in 2007. We usually consider anything below 80.00 as low for VVIX and over 100.00 as high. I look at VVIX finishing over 100.00 on Friday as another indication that the markets are bracing for extra volatility over the next few weeks.
Finally, on Friday I came across a trade that would benefit from a move to the low 20’s for VIX. Looking out to July expiration (July 20th) someone came in and purchased 11,600 VIX Jul 18 Calls at 2.01 and then sold 23,200 VIX Jul 22 Calls for 1.13 and a net credit of 0.25. The payoff at July expiration shows up below along with where VIX and the July VIX futures were trading when this ratio spread was executed.
The payoff above is based on July expiration, but I’m fairly certain if VIX runs to the 20’s there will be some profit taking. I’ll do my best to keep an eye on the 18 and 22 Calls and report back if I come across any profit taking.