I saw a large trade today in VIX options. Let’s break it down:
The trade was a VIX Ratio Call Spread. Paper sold Nov 23-28 1×2 call spread for $.05 credit.
Lets break this down a little further. What is Paper? Paper is an order from a hedge fund, mutual fund,
retail bank, or big trader. What’s so interesting about a 1X2 spread? Spreads are broken down to the lowest common denominator. The size of the trade was actually 10,000 of the 23 strike calls purchased and 20,000 of the 28 strike calls sold. A ratio spread where one is short contracts is called a “front spread” – this is definitely a front spread. Lets look at this trader’s perspective on this trade:
P&L and Outcomes at November Expiration:
Vix Closes in November Under $23:
The traders collects the $.05 credit (10,000 times) and takes no position on the underlying.
Vix Closes Above $23 and Under $28:
The trader will be Long the Vix future and make money anywhere in this zone with a maximum of $5 or
$500 per 1 lot with maximum profit at $28.
Vix Closes Above $28, but Below $32.95:
The trader will be short the Vix future and make money anywhere in this zone
with their breakeven of $32.95.
Vix Closes Above $32.95:
The trader will be Short the Vix future and have Unlimited Risk to the Upside.
November VIX Expiration is Wednesday, Nov 21, the Wednesday following regular November option expiration, Nov 23. Big potential gain between 23 and 32.95, big risk above 32.95.
Andrew Keene – KeeneOnTheMarket.com