This Week in VIX – 5/9/2014

The S&P 500 was quiet and VIX was quiet – that can pretty much sum up the week. The S&P 500 actually lost a little over 2 points and did so while staying within a high low range of just under 30 points. The VIX drifting around in the chart below is a reflection of this.VIX Chart


VVIX was getting a lot of attention as it came close to setting a new all-time low close last week. It also appears there were several call sellers in the market late last week which was the cause of the low VVIX level. I came across an interesting spread trade that went up about lunch time on Friday that is a cheap set up to benefit from a spike in volatility between now and June expiration. A trader sold 2,500 VIX Jun 14 Puts at 0.38, bought 2,500 VIX Jun 16 Calls for 0.97, and finished the trade up by selling 2,500 VIX Jun 30 Calls for 0.09 which sums up to a net cost of 0.50.   A payoff diagram depicting what the outcome would be at expiration appears below.  As always I highlight the closing prices for VIX and the appropriate future contract on the payoff diagram.


If held to expiration, which is doubtful but it is a certainty I can work with here, the trade is a loser below 16.00 with extra risk under 14.00 due to the short position in the VIX Jun 14 Put. Over 16.00 the trade looks good with things capping out at 30.00, again due to a short position, this time in the 30.00 Call. As mentioned before, VVIX is very low and historically the implied volatility of VIX options has moved higher with gains in the underlying index. That would probably be an added bonus for the long position in the VIX Jun 16 Call if there is any spike in volatility. This will be a trade I’m going to keep an eye on for the next few weeks and may revisit if there is a volatility spike between now and June 18th.

Finally, the VIX curve got a little less steep last week with May expiration approaching and very little action out of underlying index. With VIX basically unchanged. The May future dropped almost 6% and June lost 4%. This can be thought of as a sort of ‘time decay’ for the VIX futures as expiration approaches and the unchanged VIX last week makes it easier to isolate the decay on a chart.


  • Chris Handy

    This was a brief, yet informative article. Having recently been intensely interested in volatility and volatility indices and ETF’s, specifically UVXY and VIX, I’ve noticed that the former is declining consistently, seemingly counter to the opinions of most of the other investors with whom I communicate. That being said, I believe we are beginning to see the same in the VIX proper. Sector rotation, movement from spec stocks to conservative equities, and a seemingly calmer geopolitical atmosphere are resulting in less volitility, fueling the decline. I have yet to be convinced otherwise and believe this trend offers opportunity for profit for those who are watching the trend and potential huge losses for other who fail to notice, including for the trader whom you site. Chris Handy, Gainesville, FL

  • john

    very nice