Last Week in VIX – 1/12 – 1/16

If the January VIX futures could speak they probably would say something like, “I told you so”. Of course the contracts can’t speak, but the point behind this is a week ago the January contract closed at a pretty substantial premium to VIX relative to recent history. A week later both the January contract and spot VIX are higher. Remember VIX futures are priced based on a risk premium associated with being short volatility or the anticipation that VIX make move up in the near term.   A wide spread doesn’t always mean VIX is going to move higher, but the Monday morning quarterback in me sees it now.

VIX Curve

January VIX options and futures expire this coming Wednesday on the close. At least one trader expects VIX to make a big move higher or lower between now and settlement date. The specific trade was a buyer of the VIX Jan 16 – 22 – 30 Iron Butterfly. This involved selling the VIX Jan 16 Put and VIX Jan 30 Call then buying the VIX Jan 22 Put and VIX Jan 22 Call. All these trading legs were combined for a net cost of 2.65. The payoff diagram below shows how this trade will turn out if held to expiration on the open Wednesday.


For this trade to work January VIX settlement needs to be either lower than 19.35 or higher than 24.65. To the downside the potential profit is capped at 3.35 while settlement at 30.00 or higher would result in a profit of 5.35.