My favorite Barron’s columnist (Steven Sears) talked extensively about my favorite topic over the weekend (VIX). The Striking Price was all about VIX with the aptly titled “Taking Advantage of a Low VIX”. After some discussion of how VIX at low levels has been properly reflecting low realized volatility there is some discussion about being prepared for the inevitable VIX spike that will eventually come along. Being prepared for a quick move higher in VIX means either buying a VIX call or implementing some sort of spread trade with VIX options that would benefit from a move higher in VIX and VIX futures.
It has been well documented that I spend an inordinate amount of time focusing on VIX and trading volatility. Last week there were plenty of bullish trades on VIX thus bearish on the equity market spread trades executed. I decided to choose three, one from Wednesday, Thursday, and Friday of last week, to illustrate the types of trades that have been coming through the VIX pit. Each of these trades are methods to take advantage of a move higher in VIX and the corresponding VIX futures contracts.
Friday close to the beginning of the weekend (which means at the end of the day) there was a buyer of 8,000 VIX Jul 15 Calls at 0.98 who also sold 8,000 VIX Jul 17 Calls at 0.63 for a net cost of 0.35. The payoff diagram below shows that a quick move up to 17.00 could result in a profit up to 1.65.
Late in the day on Thursday there was a buyer of 5,000 VIX Jul 16 Calls at 0.80 who also bought 5,000 VIX Jul 17 Calls at 0.67 for what is affectionately referred to as a call stoopid. Yes I spelled that correctly and now it is not an insult to the trader. It just means that two options of the same type (calls) with the same expiration (July) were purchased together. VIX and the July VIX futures in the low 20’s over the next few weeks would render this trade anything but stupid.
Finally, on Wednesday there was a trader looking past the summer for higher volatility. We all ‘know’ the last four months of the year are the most treacherous for the stock market (please understand that ‘know’ and what is quantitatively true are two different things. Based on an outlook that would include higher volatility between now and September there was a buyer of 36,000 VIX Sep 21 Calls at 0.75 who then sold 36,000 VIX 30 Calls at 0.25 for a net cost of 0.50. The potential payout at September expiration appears below.