The Week in VIX – 11/2 – 11/6

VIX finished the week closer to 14 than 15 based on a muted response to the employment number and a lack of known potential volatility events on the horizon.  The fear index did manage to spend a little time on Monday and Tuesday under 14.00 which is a level that many consider the new ‘floor’ for VIX since we are about to enter a period of increasing interest rates.    The futures all followed the index lower which would be expected with smooth sailing for the stock markets to be the consensus near term expectation.

VIX Curve - Table

I continue to plot the front five week VIX futures expirations in a generic format as shown below.  My goal is to get a handle on what we should consider a ‘normal’ short term VIX curve.  Flat to slight contango is what pops up when VIX is low.  The bump between the Week 4 (December 1st) and Week 5 (December 9th) futures had me checking the economic calendar, but I couldn’t find a good reason for that slight drop off on the right side of the chart below.

VIX Weeky Curve - Table

I went poking around on Thursday evening looking for trades that were executed in VIX options, but appeared to be focused on the pending Non-Farm Payrolls Number that came out this past Friday.  The only thing that popped out at me was a pretty large buyer of VIX Nov 11th 25 Calls for 0.05.  Considering spot VIX was around 15.00 when this buyer was in the market, I think they either expected a truly horrendous employment report, at least with respect to the impact on the equity market or they believe a market calamity is pending this weekend or at least before next Wednesday’s settlement.

What did catch my eye on Thursday was a couple of bull call spreads focused on December.  It’s a bit early to see such trades, but a lightbulb sort of went off Friday morning when I heard the odds of a rate hike in December increased after the release of the employment number.  If this anticipation starts to hang over the equity market as December 16th (which is both standard December VIX settlement in the morning and the FOMC announcement in the afternoon) approaches a rise in VIX is very possible.  Two trades, that both look to the 20’s for VIX, went off late Thursday.  One trader went long the VIX Dec 16th 19 Calls at 1.36 and sold the VIX Dec 16th 29 Calls for 0.37 for a net cost of 0.99.  The payoff at December VIX settlement appears below.

VIX PO 1

The other trade that looked to a higher VIX in the middle of December purchased the VIX Dec 16th 20 Calls at 1.19 and sold VIX Dec 16th 25 Calls at 0.61 for a net cost of 0.58 and a December payoff settlement that looks like the diagram below.

VIX PO 2