Weekend Review – VIX Options and Futures – 3/28 – 4/1

VIX closed on the 2016 lows last week and flirted with a 12 handle. I was asked at a seminar in Scottsdale, AZ on Thursday night how long it will take for VIX to touch 12. I responded that I had a hard time seeing a 12 handle this year. It won’t take much for me to be proven wrong.

Something that keeps me in the higher volatility regime camp is the relative level of VIX futures to spot VIX. Note below that the April futures are at a hefty premium to spot VIX despite getting the monthly employment number behind us.

VIX LT Curve

The biggest VIX option trade from Friday may have been the best.   On the open, with VIX over 15.00 and the April futures at 16.60 a trader came in and purchased 15,000 VIX Apr 14 Puts for 0.16. The payoff diagram below shows the VIX price as well as the April futures price when the trade was initiated. Just for fun I also placed the VIX close of 13.10 on the chart. We know that VIX options are priced better using the corresponding future than the spot index.  So despite VIX being .90 below the option strike price, the Apr 14 Puts closed 0.30 x 0.35. Still 0.30 bid for options that cost 0.16 on the same day isn’t a bad start for this trade.