VIX more than doubled last week in what was the biggest week over week percent change for VIX in history. Specifically VIX rose 118% from Friday to Friday. This past week was August settlement week for VIX futures and options. In the past this would mean that the next expiring future would have weeks of trading left. However, we now have VIX Weeklys trading at the CBOE Futures Exchange. More on that in a minute.
The curve shifted higher and into backwardation last week. The cheapest future among the standard monthly expiring contracts was the December contract. Note the September contract rose over 31% as the biggest gainer among the futures on this table.
Below is a new graphic that I will start including as part of this weekly update. A little explanation is in order. Week 1 represents the change in price between the VIX future than expired last week and the Friday close for the future that will expire this coming Wednesday. The idea is to have a comparison of the near dated futures along with the levels of the soon to expire contracts relative to each other and spot VIX. Note the VIX future expiring on August 26th settled Friday at 24.775, just over 3 points lower than spot VIX. This is much more in line with the current VIX index price of 28.03 than the September future that finished the week at 19.90.
I searched around for volatility sellers on Friday and they appeared to be out in force. I wanted to find something a little out of the ordinary which is never really an issue in the VIX space. Mid-day on Friday there was a seller of the VIX Sep 14 Calls at 5.15 who also sold VIX Sep 20 Calls at 2.55 and then finished up by purchasing the same number of VIX Sep 30 Calls for 0.85 and a net credit of 6.85. The result is a trade that is not for the faint of heart and results in the payout at September expiration that is displayed below.
Break even for this trade is 20.85 and then losses mount quickly until VIX hits 30, then a partial hedge slows thing down a bit. However, theoretically that line continues to move lower past the 30 price level.