Nothing on the week over week curve chart shows what really happened last week in the markets. VIX finished the week in line with the previous week’s closing price as did the S&P 500. However, at one point during the week VIX was just over the psychologically significant 20 level or up 19.4% and the S&P 500 was down about 1.5% from the close on July 2nd. It is worth noting that the shape of the curve below remains pretty steep as we look to the always interesting fourth quarter.
One trader stepped up and faded the VIX move from Wednesday using a bear call spread. With VIX at 19.30 and the July futures in the 18’s there was a seller of the VIX Jul 19 / 25 Call spread for 1.04. Specifically they sold the VIX Jul 19 Call at 1.73 and purchased the VIX Jul 25 Calls for 0.69. As always a payoff at expiration is displayed below.
The expectation would be that July VIX settlement will come in somewhere under 19.00 and both legs of this trade will expire with no value. More bad news from around the world could result in a lower stock prices and a spike in volatility. This is a worst case scenario for this trade and the result could be as bad as a loss of 4.96 per spread. Finally, I took a quick look at this spread and where it was priced on the close Friday. So far things look good as the VIX Jul 19 Call was offered at 1.00 and the VIX Jul 25 Call was bid at 0.35 which means if the trade were exited on the close Friday the realized profit would stand at 0.39 a spread.