With the stock market kicking off 2017 on a bullish note VIX tested the 2016 closing low finishing the week 0.05 above last year’s low of 11.27. The futures followed suit, especially the January contract which goes off the board two days before the 45th man to ascend to the presidency does so on January 20th.
I was checking in on the Weekly VIX futures and options activity last week and came across an interesting set of numbers. The chart below highlights the at-the-money implied volatility for VIX options expiring each week through February 15th. I found the two ‘bumps’ to the upside interesting with respect to known unknowns on the horizon. Note the first move higher occurs between the January 18th and January 25th contracts which expire just before and after inauguration day. The next step up occurs between February 1st and the 8th. The next FOMC announcement occurs the afternoon of the 1st which is just hours after Feb 1 VIX futures and options expire and the next monthly employment number comes out on the 3rd.
Mid-day on Friday VIX was looking like it wanted to finish the week with a 10 handle. Two traders came in and took advantage of the very low VIX (11.08 at the time) and purchased two call spreads using standard January options. The first trade involved a purchase of the VIX Jan 18th 13.50 Calls for 0.43 and selling the VIX Jan 15.00 Calls at 0.23 for a net cost of 0.20. A few minutes later there was a purchase of the VIX Jan 18th 15.00 Calls at 0.23 which was matched up with a sale of the VIX Jan 18th 17 Calls for 0.12 or a net cost of 0.11. The payoff diagram below shows outcomes for each trade if held through settlement on the morning of the 18th. The 13.50 / 15.00 spread appears in blue while the 15.00 / 17.00 spread shows up as the red line.