Weekly Review – VIX Futures and Options – 12/7 – 12/11

VIX put up a heck of a Friday to top off the biggest weekly gain on a percentage basis since the debacle that was late August.  I mentioned this in my previous blog, but it is worth reiterating.  While at RMC Asia one of the best comments stated something to the effect of, “When the VIX curve is flat the market is uncertain”.  That pretty much describes the term structure chart from Friday.

VIX LT Table

I’m beginning to learn that flat to slight contango is normal with respect to the VIX term structure created with Weeklys futures.  This would be a slight difference between using the futures expiring for the next five weeks in a row to create a term structure chart and the longer dated futures.  However, backwardation does kick in during periods of high volatility and that is what we got Friday.

VIX ST Table

The December 23rd VIX Weeklys saw some nice volume on Friday.  Over 70,000 contracts traded with a big chunk of the volume in the 16 Calls, 16 Puts and 20 Calls.  I saw an 8,000 lot go up early in the day Friday when VIX was at 21.02 (about 15% below where the final settlement for the week).  This is a best guess, as I was not in Chicago at the time, but it appears this particular involved a seller of the VIX Dec 23rd 16 Puts at 0.25, selling the VIX Dec 23rd 16 Calls for 3.85 and the rounding out the trade with a purchase of the VIX Dec 23rd 20 Calls for 1.95 and a net credit of 2.15.


The payout above assumes the trade is held until expiration on the open December 23rd.  In hindsight this particular trade was done a little early on Friday, but if we could time travel and do the ‘should of’ trades I would be in the ‘B’ club (yes I just wanted Silicon Valley).  As long as December 23rd VIX settlement lands between 13.85 and 18.15 this trade ends up with some sort of profit.  If VIX settlement lands right on 16.00, then someone will be able to purchase a whole truckload of the GI Joe’s with the Kung Fu grip for Christmas.