The Week in VIX – 10/6 – 10/10

The weekly rise last week was the seventh largest percentage gain in the CBOE Volatility Index since 1990.  Admittedly VIX was coming off a low base, but I think that can be seen as an indication of just how lulled into complacency investors and trader have become by the stock market action of the past two or three years.  When buying the dips becomes a natural reaction and too easy we are close to the end of buying the dips becoming an easy trade.

VIX PA

The curve went from contango to backwardation as can be seen below.  This week over week change is so dramatic that I included it in a presentation I gave this weekend.  I have a funny feeling I’ll be using it a lot over the next few months as an example of why sellers of volatility get and deserve a risk premium.

VIX Curve

The last big trade of the week in the VIX pit was the one that caught my eye.  Just 90 seconds before the end of a tumultuous week there was a seller of two different call spread with different strikes and expirations.  In one spread trade someone sold VIX Nov 17 Calls at 3.10 and VIX Dec 19 Calls at 2.45.  At the same time they purchased the VIX Nov 27 Calls for 0.87 and VIX Dec 29 Calls for 0.88.  The net credit for the whole package is 3.80.  As a frame of reference Nov VIX closed at 18.65 and Dec VIX closed at 18.45.  If held to the two expiration dates if we have November expiration under 17 and December lower than 19 I guess some lucky kid will be getting the GI Joe with the kung fu grip for Christmas.