Considering Our Options – $VIX

by CC June 3, 2013 3:08 pm • Commentary

The VIX has finally shown some heart in the past few days. As we expected, the index crept higher a few weeks ago even as the markets were trying to make new highs as volatility started picking up in commodities and foreign markets. When the US market had its big drop into the close on Friday the VIX really got going and even today, with the market green, it’s even higher.

With all this going on it’s a good time to revisit the long VIX trade that we executed on May 15th:

TRADE: Sold the VIX (12.87) June 14/12 Put Spread to Buy the June 16 / 20 Call Spread, Even Money
  • Bought 1 June 12 Put for 0.08
  • Sold 1 June 14 Put at 0.73
  • Bought 1 June 16 Call for 1.23
  • Sold 1 June 20 Call at 0.58


Right now June VIX futures (which this trade is priced on) are about 16.30 with the spot VIX at 16.70. That works out to about 55-60c on our structure which we put on for even, so a nice little profit if we were to take it off here. This morning with the June futures about 40c higher, the structure was worth about 15-20c more. So right now the structure is tracking just slightly above parity to those June VIX futures. If the spot VIX can stay at or above these levels for a few consecutive days the June futures will continue to drift higher helping the structure even more, but if the market were to rally from here the opposite is true.

Because the futures are basically at-the-money to our long call, this trade is extremely sensitive percentage wise to a sharp drop in the VIX on any market rally. With that in mind we’re going to keep a close eye on the trade as we did a similar trade the month before, watched the VIX spike to 18, did nothing, then watched the structure go from a really good winner to a small winner in a very quick timeframe.

The difficulty in managing this trade is that the VIX itself is so tempting, and something we paid even for has the potential to be worth up to 4 if the market correction continues and the VIX trades above its historical average (19ish) for more than a day or two. So what we’ll do is leave it on for now, with the expectation of continued volatility over the next few weeks, but mindful of the fact that this trade can go back to even fast if the market found stable footing and rallied from here.