VIX and the near month futures were in a pretty wide range this past week and the impact was continued strong volume in June options despite there only being a couple trading days left until expiration. A trade that I found kind of interesting (from an academic point of view) occurred on Friday. There was a seller of two VIX Jun 15 Puts that was also buying one VIX Jun 17 put. There appeared to be 80,000 of the 15’s and 40,000 of the 17’s trading with a net cost to the spread buyer of 0.625. A payoff diagram if this is held through Wednesday expiration appears below. If the intent is to hold through expiration then June VIX settlement between 13.625 and 16.375 is the area where the trade would turn a profit. The ideal situation is for June VIX to settle right at 15.00 where the profit would be 1.375. With VIX going out on Friday at 17.15 the holder of this position is looking for a bullish equity market and lower VIX.
The iPath S&P 500 VIX Short Term Futures ETN (VXX – 20.79) can get a bad rap sometimes, but a very smart man once told me that VXX will do what you want when you want it. The meaning behind this blanket statement was that although contango places a headwind in front of a long position in VXX when VIX and VIX futures rally can be a profitable trade. VXX did what a long holder would want and was up over 9% on the week. VXX was up strong despite the curve remaining in contango. Another leg up in VIX that take the curve into backwardation would give VXX and even bigger boost to the upside. Even the farther dated iPath S&P 500 VIX Mid Term Futures ETN (VXZ – 22.34) had a good week trading up by almost 5% as the whole VIX curve moved up in a fairly consistent move with VIX up 13%.