With Spot VIX approaching 52 week lows, and the SPX matching multi-year highs we find it hard to sit on our hands and not take a shot for a short term move back to the mid or higher teens over the next month. At some point soon, the VIX will not be able to go any lower, which doesn’t mean looking for ways to play for a bounce will be profitable given the unusual skew towards calls in the product, but as we head into Q4 earnings season, and a month that should be littered with political wrangling about the debt ceiling, we thought it made sense to have a long VIX structure in our back pocket, one that has a great payout if things get wild. [/private]
TRADE: VIX ($13.56) Bought the Feb 17/20/23 Call Fly for .27*
-Bought 1 Feb 17 Call for 1.12
-Sold 2 Feb 20 Calls at 1.26 (.63 each)
-Bought 1 Feb 23 Call for .41
Break-Even on Feb 13th Expiration:
-Profits btwn 17.27 and 22.73, make up to 2.73, with max gain at 20.00
-losses of up to .27 btwn 17.00 and 17.27 and btwn 22.73 and 23, with max loss of .27 below 17 or above 23.
* with spot at 13.56 the screen bid ask for the butterfly was .10 at .40, I bid .30 and got filled at .27, this is a very important fact when it comes to trading this product rarely do u have to cross full bid/ask to get done.
TRADE RATIONALE: Remember that the options are priced off of VIX futures, not the spot VIX, they generally move in unison but not by the same percentages and are certainly not the same thing. As a result, current Feb VIX Futures at 16.20 means that the VIX spot of 13.60 is not the true indication of how Feb options are pricing. However, we bought a call fly that offers good risk/reward if the VIX spot does move higher as we approach the government talks in the next month.
I AM RISKING WHAT I AM WILLING TO LOSE HERE, THERE IS A LOT OF WOOD TO CHOP FOR THIS TO BECOME PROFITABLE IN THE NEXT FEW WEEKS, BUT WITH A NEARLY A 9 TO 1 POTENTIAL PAYOUT FOR A MOVE BACK TO THE HISTORICAL AVG, I WILL JUMP IN AND PLAY THIS AT LEAST IN SMALL SIZE.[/private]