Checking over VIX trading activity from Monday I came across a couple of interesting transactions that turned out to be related. I was scanning July option activity and noted that mid-day a customer order hit the VIX pit to sell 15,000 VIX Jul 26 Calls at 0.20. When I started looking at the August trading activity I saw an order on the tape buying 15,000 VIX Aug 26 Calls at 1.30. After a little digging I found out these two traders were actually a spread trade where a long position in Jul 26 Calls was rolled out to Aug 26 Calls for a net cost of 1.10.
This particular trade will result in profits if there is a dramatic rise in the VIX over the next few weeks. It is difficult to determine when the July calls were purchased, but it can be assumed that there was a loss on this long position. With time running out and a near term outlook for a higher VIX rolling out to August for a net cost of 1.10 makes sense by using some of the remaining premium in the July calls to fund extending the time frame from July VIX expiration (July 18th) to August expiration (August 22nd).
With the VIX now hovering around 19.00 trading over 26.00 appears to be quite a hike. However as a reminder of what the VIX can do in a short period of time, I have attached a chart of the August VIX futures contract from July 1, 2011 through August expiration of last year. Of course this spike in the August VIX was accompanied by a 6.66% drop in the S&P 500 in a single day on August 8, 2011. As a note, this is not to say that history will repeat itself as past returns are not indicative of future results, but is a good example of how quickly the VIX moves when the stock market has a sharp loss.