VIX Option Trade Into Expiration

CBOE and the CBOE Futures exchange plan on launching VIX Weeklys options and futures respectively over the next couple of months. Usually when new markets start trading we have to do a little wait and see with respect to strategies that large traders are implementing. However, with VIX Weeklys we have over 100 expirations since VIX options were launched and we can look to trading in VIX options and futures that have occurred near expiration.

With this in mind I did some digging around on the Monday June 15th to find an interesting trade to write about. I chose that day because VIX was up 11.6% on the day closing at 15.39 and the June VIX Futures contract was up 9.5% to finish the day at 15.50. I also picked this day because the June VIX futures and options settled on the open on Wednesday June 17th.  That means any trade initiated on this Monday only had one trading day and overnight remaining until settlement.

What I came across was a bit of a head scratcher. Peter Lusk and I spent a little time debating what was going on here and we reached a consensus which I will now share. First, with seconds left in the trading day, VIX at 15.39 and the June VIX Futures at 15.50 there was a 2 x 2 x 3 spread that was executed in a handful of block trades. The trader sold 2 VIX Jun 15 Puts for 0.30 each and also sold 2 VIX Jun 16 Calls at 0.50 each. The trade was then completed as the trader purchased 3 of the VIX Jun 18 Call at 0.20 each. The net result for a 2 x 2 x 3 spread was a credit of 1.00 and a payoff at expiration that is highlighted.

VIX Short Term Chart

The two most important levels for this trade seem to be 14.50 on the downside and 16.50 on the upside. As long as June VIX settlement falls between these two levels the trade would result in some sort of profit. The best case results would be if June VIX settlement came in between 15.00 and 16.00 (spoiler alert – it didn’t). Another potential positive would involve a big one day rally in VIX which would most likely have been in response to a dramatic sell off in the equity markets (spoiler two – that didn’t happen either). The price action for the day leading up to the trade and the last trading day for June VIX options is below.

VIX Chart Fixed

This is a two day chart showing the price action on Monday the 15th and Tuesday the 16th. The price levels for VIX and June VIX at the time of the trade is highlighted. Note that this trade was not without some stress as VIX and the June VIX Future spent most of the following day grinding lower.  Tuesday VIX finished the day at 14.81 and the last trade for the June VIX future was 14.90, both prices were above the downside break-even point, but below the put strike of 15.00. However, if held to settlement, this trade still was not completed.

VIX options and futures are AM settled so any open positions do have some overnight risk. In the case of June settlement, final settlement was a tad lower at 14.67, once again above the break-even level, but not high enough for all options in the spread ending up out of the money.