The Week in VIX – 9/21 – 9/25

The S&P 500 lost just over 1% and VIX rose 6% and the standard near dated futures were higher as well, but lagged a bit.  This resulted in the curve a bit more backward than it was a week ago.

VIX Curve Table

On the short dated futures front the contract expiring this coming Wednesday finished the week at a small discount to VIX while a week ago the contract that settled this past Wednesday was at a slight premium to VIX.  I’m still getting familiar with the short dated curve which move from basically flat to backwardation on a week over week basis.  I would think that’s a little bullish for stocks, but the history isn’t really there for me to back that statement up with numbers.

VIX Weeklys Table

On Friday an interesting, and very bullish, VIX trade came into the pit in the form of a 2 x 3 call spread using October VIX options.  The trader purchased 3 VIX Oct 23 Calls for 1.87 (3 x 1.87 = 5.61) and sold 2 VIX Oct 20 Calls for an average cost of 2.815 (2 x 2.815 = 5.63) which all comes to a 0.02 credit per spread and a payoff at October expiration that looks like the picture below.

VIX PO

My assumption is the goal is to take profits and move out of this trade on any volatility spike.  The second thought is that there is an expectation of VIX being below 20.00 at October expiration if there is no spike over the next few weeks.  In the case of VIX under 20.00 the trade expires with no value and the small credit basically covering commissions on this trade.