This Week in VIX Options and ETNs – 5/3/2013

In the VIX options arena volume was a little light as it appears most May positions are rounded out, but there are some interesting trades to discuss.  Early in the week there was a buyer of VIX May 16 Calls over the course of a couple of days.  It was noted that more sellers came in midweek which pushed VVIX lower to just over 80.00.

A particular trade that I found interesting was done with June options on Thursday.  There was a seller of the VIX Jun 16 Straddle combined with buying an equal number of VIX Jun 18 Calls.  By selling two options and buying a single out of the money call his trade was initiated for a credit of 2.40.  The worst case scenario is that VIX is dramatically below 13.60 at June settlement.  That is the only break-even level for this trade.  A huge rally for VIX is not an ideal situation, but at any settlement value over 18.00 a profit of 0.40 would be realized.  The complex payout for this trade at expiration appears below.

VIX Short 16 Straddle Long 18 Call Spread

The long ETN space took it on the chin this week as VIX moved down to the 12’s for the first time since the gold market meltdown a couple of weeks ago.  This put the expected pressure on the ETNs as the front month futures came down in sync with the index.

A VXX trade of note was pointed out by Chris McKhann from optionMONSTER.   The trade involved buying May 24th VXX 17.50 Puts at 0.51 and selling May 3rd VXX 18.00 Puts at 0.06.  These May 3rd Puts are now expired, but the long VXX 17.50 Puts are still open and now trading at 0.49 which gives this astute trader a small unrealized profit of 0.04 with three more weeks to go before the 17.50 Puts expire.