This Week in VIX – 2/21/2014

VIX was up despite a fairly flat week over week performance for the S&P 500.  Part of this goes with the three day weekend effect, but there is also a nervousness that seems to be creeping into the market.  Depending on your market outlook this could either be considered bullish or bearish – bullish if you believe the market climbs a ‘wall of worry’ or bearish if you think that higher volatility can be a precursor to a bearish equity market.

One trade on Friday in VIX options caught my eye.  There was a buyer of VIX Mar 17 Calls at 0.74 who sold twice as many of the VIX Mar 22 Calls at 0.30 each creating a ratio spread at a net cost of 0.14.  A moderate spike in volatility (ideally the March future at 22.00) would be a positive in this case, while a volatility ‘event’ that pushes VIX to the upper 20’s could be a problem.  The payoff diagram below shows just how this would work –


As far as the curve goes, VIX climbed 8% and the March future rose 0.45.  Beyond that the rest of the VIX futures curve was pretty inactive last week.


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Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…