Despite a treacherous Friday in the equity markets, VIX was lower last week as were all the VIX futures contracts. We truly had a textbook shift lower in the curve as VIX dropped just over 3% and the front three months played a little catch up to the downside with June going off the board this coming week. The slope of the curve still appears pretty steep to me going into the end of 2015 despite the uniform drop in prices last week.
June VIX futures and options expire on the open this coming Wednesday. The Friday before expiration I’m always on the lookout for trades that appear to be trying to anticipate where the market will be either on the close Tuesday before expiration or at settlement on Wednesday morning. With VIX at 13.86 and the June future around 14.15 I came across a trade that looks like there is an expectation for lower VIX over the next couple of days or just that the June contract will drift down to where the spot index is trading as time runs out on the June VIX options.
The trader sold a few hundred VIX Jun 14.50 Calls at 0.45 and at the same time purchased VIX Jun 14.50 Puts for 0.80 and a net cost of 0.35. Astute traders, or anyone that looked at the payoff diagram below, knows that this is a synthetic short position with the equivalent entry point of 14.15. If held to settlement this is the over / under for the trade being a profit or loss. Do note that VIX at 13.86 is 0.29 lower than the break-even price of 14.15 so in the unlikely event that VIX remains unchanged between now and Wednesday morning settlement this trade would actually be a winner.