Block Trade Analysis – Short VIX Straddle + Long OTM Call

The June 2015 VIX futures and options met their demise on the open yesterday with settlement coming in at 14.67. One trader moved on to the following month with a trade structure that is unique in the option world, but pretty common in VIX world.

Mid-morning on Wednesday a trader sold 22,800 VIX Jul 15 Calls for 1.73 and 22,800 VIX Jul 15 Puts at 1.18 who then completed the trade through purchasing 22,800 VIX Jul 22 Calls at 0.72 for a net credit of 2.19. The payoff at expiration appears below with a brief discussion to follow.

VIX PO 1

The best of all worlds for this trade has Jul VIX settlement right at 15.00 and all options expiring with no value. A profit of 2.19 results from this highly unlikely scenario. More important may be the break-even points which are 12.81 to the downside and 17.19 to the upside. Note there is no put protection on this trade, which is common since VIX hasn’t broken 10.00 on the downside for almost a decade. It can go below 10.00, but just hasn’t.

I know this trade is not permissible for all traders so I took a look at low strike July VIX puts and yesterday the VIX Jul 12 Put could be purchased for 0.05 which is worth mentioning for two reasons. First, as mentioned above, if a trader is not allowed to sell a put without some sort of offsetting position the VIX Jul 12 Put at 0.05 gives them an opportunity to loosely replicate this trade. Second, for 0.05, if VIX does approach 10.00 there is some protection against any losses below 12.00. I created another payoff diagram based on the trade that was executed, but showing the payoff if a long VIX Jul 12 Put is purchased for 0.05 which changes the credit to 2.14 from 2.19.

VIX PO 2

The payoff looks pretty much the same as the original with the break-even points moving in slightly and of course limited losses to the downside.