The early part of the week was certainly interesting for VIX options. And, the participants are making moves on—you guessed it—the fiscal cliff!
We saw 2 major plays on this scenario:
The first was a large seller of the VIX Jan 20 calls. This player thinks the fiscal cliff will be avoided. If the cliff is avoided and SPX rallies the historical inverse relationship between SPX and VIX suggests that VIX will fall. The risk of course is if VIX increases beyond 20 at expiration.
The second was a buyer of the VIX Jan 25-35 bull call spread. They bought the VIX Jan 25 calls and sold the VIX Jan 35 calls. This player thinks we will go off the cliff. If we do, VIX will very likely rally, again due to the inverse relationship between SPX and VIX. The risk is a VIX below 25 at expiration.