2nd Trade Update VIX: Today is the Moment of Truth For My Mar/Apr Calendar, Ugh

by Dan March 20, 2012 9:11 am • Commentary

Trade Update March 20th, 2011 at 2:01pm:  Market doesn’t appear to budging today as banks and AAPL are doing what they know how to do best, lead our markets higher…..I just sold the March 17 calls at .10 and now have to figure out what to do with the April 30s I am short as I don’t want to be naked short these….I have been waiting for a while for a vol spike and I am not sure it makes sense to be naked short anything that would benefit from such a spike.  Ill be back with another update by the close.

Trade Update March 20th, 2011: Last week I took a look at the steep term structure in the VIX futures and wanted to take advantage of this by buying a short dated, near the money call in March and selling a longer dated, out of the money call in April, playing for a move higher in March and a bit of a reversion in April.  This hasn’t happened yet and with just one day of trading left before March expires (on Tonight’s close) I will be watching this position very closely, as I will need to sell my March 17 calls and try to re-coup what premium I can for them, while also making a decision of what to do with April that I am short.  If we get a big near term spike in vol today (which could be in the cards with the DAX down 1.4% and our S&P futures down 63 bps as of 9:05am, I could get bailed out if we saw the VIX bounce just 15% today, which wouldn’t be a huge move at all for a VIX that closed at 15 yesterday.

So to recap, I paid 1.04 for the March 17 calls, and they care currently worth about .125 (ouch) and Sold the April 30 Calls at .89, they are currently worth about .70   So I am down about .90 in the march and up about .20 in the April, which makes this a not so nice trade for me, but I will look to take advantage of any near term pop in Volatility to get out of this position TODAY.

Check back later for updates.

Original Post March 13th, 2011: Low Premium Way to Take Advantage of Abnormally Steep Term Structure

The VIX is melting, trading at 14.63, down about 30% a week.  This sort of price action on any sort of trade-able security/index catches my attention.  The chart below shows the massive divergence btwn the SPX and the VIX, and the chart below shows how this relationship topped out last May when both indices were at similar levels.  

[caption id="attachment_9524" align="aligncenter" width="300" caption="VIX vs SPX 1 Yr."][/caption]


The chart below shows the steep Term Structure in the VIX Futures as we see prices of north of 20 starting next month in April, and as high as 28 in Nov.  The steepness of the term structure is about 2x the normal levels.  In a quiet market we would expect to see VIX futures to be in contango since current volatility is low, this steep of a term structure is still out of the ordinary, indicating the fear of unexpected future events.

[caption id="attachment_9525" align="aligncenter" width="300" caption="VIX Futures Term Structure from Bloomberg"][/caption]


This short term anomaly presents an interesting short term trade with March VIX options expiring next Wednesday the 21st of March on the close, I can get at the money exposure for a short term pop in volatility for low premium by selling an April call 45% above current Apr vix future levels

TRADE: VIX ($14.63) Bought the March21st 17 / April18th  17 / 30 Diagonal Call Spread for .15

-Bought the March 17 Call for 1.04

-Sold the April 30 Call at .89

Break-Even On March 21st:

If VIX is below 17 the calls you own in March expire worthless and you will need to cover your short April 30 call, or create a call spread by buying a lower strike call.

If the VIX is above 17, you will make the difference btwn the call that you own and the current spot price, less the difference in price of the April 30 call that you are short.