The Week in VIX – 4/20 – 4/24

VIX finished the week at 12.29 which is the lowest close since early December. Despite the S&P 500 making a new all-time high to finish the week, the May VIX futures settled at 14.625, a decent premium relative to VIX. We saw this last month until the Non-Farm Payrolls release. After the number the premium came in pretty quickly. We have to wait to see if the pattern repeats as the number does not come out until Friday May 8th.


One of the most dynamic VIX spread trades is a risk reversal in which an out of the money put is sold and subsequently an out of the money call spread is purchased. I have seen many of these trades done at either a credit or debit with the worst case scenario being VIX at very low levels at expiration. The trade that caught my eye on Friday sold 9,500 VIX May 13.50 Puts at 0.38, purchased 9,500 May 17.00 Calls for 0.67 and finished things off by selling 9,500 May 23.00 Calls for 0.28 and a net cost of 0.01 (excluding commissions). The payout at expiration appears below.


I highlighted the profit or loss at expiration (in purple) for different significant levels on this diagram. Starting on the left -3.51 shows the loss per spread if May VIX settlement is at 10.00. That would be a record low settlement and the all-time low for VIX is 9.89 so I think 10.00 is a reasonable floor, although it is possible for VIX to dip under 10.00.   Between 13.50 and 17.00 this trade loses 0.01 as all options would expire out of the money. From 17.01 to 23.00 there would be a partial profit and then finally things are capped at 23.00 with a profit of 5.99.

Finally, I am aware a naked short put position is not appropriate for all traders (or allowed). I was going to add a note here saying that one might always purchase the May 10.00 Put for 0.05 to replicate the trade, however, when I checked the quotes the May 12.00 Put was offered at 0.05 on Friday so that option may have been bought for 0.05 to fit a trader’s permission level, but this would also result in downside risk of 1.56 instead of 3.51. That may be worth the 0.05 regardless of what a trader is allowed to do in their account.

  • George

    Isn’t this trade called a short put broken wing butterfly ?

    • Russell Rhoads

      I use the term risk reversal when discussing any trade that sells an OTM put and uses the proceeds to buy out of the money calls – this is a case of selling the OTM put and buying a call spread so I used that term. I guess short put + long call spread works as well. A butterfly has a maximum gain at one price point so it wouldn’t work as the name here.

      • George

        Thanks for the clarification. I think its just a spelling mistake. Its then 9,500 May 17.00 Calls for 0.67, like the selling of those 9,500 May 23.00 Calls