Everyone knows what an ear worm is and if not you will now.  It is basically when a song is stuck in your head.  Since Monday REM’s Orange Crush has been on constant replay in my head.  VIX losing 26% and the front month down 14% definitely qualify as a volatility crush. 

VIX Table TS 428

Since all this crushing was caused by events in Europe (France specifically) we will take a look at the week over week VSTOXX and associated futures term structure change.  Now I have Officer Barbrady from South Park in my head saying, “Nothing to see here”.  However, that’s anything but true.  VSTOXX got hammered as did the futures markets.  Worth noting is that as of Friday the May and June contracts at a discount to spot VSTOXX.  Between now and May expiration there is the final round of the French election and before June expiration we get an election in Great Britain.  It appears the markets expect there will nothing to worry about with either of these known unknowns. 


Late Friday, with VIX right at 11.00 and the standard May futures contract at 12.30 a fairly large and cheap trade came into the VIX pit.  A bull call spread was created with 12,000 May 20 VIX Calls purchased for 0.15 and 12,000 VIX May 21 Calls sold at 0.12 for a net cost of 0.03.  The payoff diagram below shows the payoff on May 17th AM settlement and a potential payoff with 10 days left to expiration. 

VIX PO 428

Note the half way to expiration profit is nowhere near as the maximum payout for this trade as shown by the at expiration line above.  However, keep in mind the cost of this trade was 0.03 and exiting at 0.20 or 0.30 is a pretty nice return.