I’ve been spending more time focusing on block trades that come through the VIX option pit at CBOE to get ideas of how large traders are positioning themselves. A really unusual one hit the market on Thursday. I’m trying to piece this together from a handful of trades so I may be off just a little, but there was a large buyer of VIX Sep 18 Straddles that sold 3 VIX Sep 25 Calls for each straddle purchased. The net trade appears to be long the VIX Sep 18 Call at 2.90, long the VIX Sep 18 Put at 3.00, and short 3 VIX Sep 25 Calls at 1.35. The net cost for this would be 1.85 per spread. Below is a payoff diagram is this trade is held to September expiration. My feeling is there may be some trading around this position, but I can’t get in the mind of the trader so we’ll look at the trade this way.
Below 16.65 and above 19.35 the trade makes money and there is no risk if we have a very low VIX at September expiration. Due to the short position in the VIX Sep 25 Call there is risk to the upside. Once VIX trades above 27.90 the trade becomes risky and with no protection on the upside, the theoretical loss is unlimited.
VIX finished the week right at 15.00 as fears of an expansion of the conflict in Ukraine subsided. Janet Yellen scared the market a little mid-week, but that too was short lived. The pattern of VIX moving up and then returning to lower levels seems to be a recurring one, but like one the instructors at the Options Institute likes to say, a pattern repeats until it doesn’t. Eventually one of these flare ups in volatility and drops in the equity market may last longer than a few days.