Considering Our Options – $VIX VapoFly

by Enis August 19, 2013 4:04 pm • Commentary

So VIX spot is back above 15 for the first time since the beginning of July.  Back then, we actually initiated a 15/20/25 August call fly in the VIX (detailed below) for $1.35, with the thought that this structure would be a cheap way to play for an eventual bounce in the VIX.  Well, it’s come down to the wire, but the VIX is finally bouncing in the past few days.

The trade is now worth about $0.30-$0.35, so it’s still a large loser.  The real question for us though, is what should we do now?  The VIX trade expires on Wednesday morning’s opening print, cash settled.  So if we hold the trade through to expiry, we are beholden to the opening settlement price of the VIX.  If it opens at 16 for example, then our trade would cash settle worth $1.  If it opens at 14.95, our trade would cash settle worth $0.

Given that the structure is currently only worth about $0.30, we are going to hang on to the trade for now.  We have all of tomorrow to sell it, and if we don’t, we still have a potential “out” if the VIX opens higher on Wednesday morning.

Original Post July 5th, 2013:  New Trade – $VIX VapoFly

A couple days ago I laid out the case for why FB shares should consolidate in the near term (below) and later detailed a trade that would take advantage of implied volatility compressing after the stocks massive 40% move since reporting its 2Q earnings beat last week.  While Wall Street analysts and investors alike see continued success in mobile a

Last week we highlighted a VIX trade to play for continued volatility in the market but with some protection against decay in the form of an in-the-money butterfly. With the market up this morning and the VIX down, despite what’s happening in bonds and FX, we thought it was a good entry point on this trade. We’ve rolled out to Aug from what we initially highlighted in the Name That Trade below. July is trading at similar values and is a better play for a quick reversal in the market but offers different risk reward profiles than Aug and Aug better matches our book:

Trade : Buy the VIX (Aug futures ~18) Aug 15/20/25 Call Butterfly for 1.35
  • bought 1 Aug 15 call for 3.65
  • sold 2 Aug 20 calls at 1.50 (3.00 total)
  • bought 1 Aug 25 call for 0.70

Break-even on VIX Aug expiration (8/21):

  • profits between 16.35 and 23.65
  • losses below 16.35 and above 23.65 with total loss of 1.35 below 15 and above 25

Trade Rationale:

The Aug VIX futures right now are about 18. The spot VIX is just below 16. This is essentially a bet that we see continued volatility and that 16.35 represents a fairly safe place to be long the VIX. The latest jobs data adds fuel to the fire that the Fed may be closer to the end on QE and with the reaction in bonds and currencies, and with the continued volatility in markets around the world, this is a good structure to bet that the next month sees continued volatility in U.S. stocks.



We’ve placed a few VIX trades over the past few months with the last one setting up nicely for the market’s reversal from the highs. We really liked the structure we used and will likely revisit it in the future should the VIX get back to the low teens. Here’s how that structure looked:

TRADE: Sold the VIX (12.87) June 14/12 Put Spread to Buy the June 16 / 20 Call Spread, Even Money


With the market having had a sharp selloff only to see a reversal off lows this past week, we were thinking of a structure that would work in a VIX environment where the volatility index is off its recent highs, but not quite low enough to revisit the original structure. One that we like, but would only put on at a slightly better price is the 15/20/25 in-the-money fly in July. We would put this on with the thinking that there more volatility is ahead, but with enough protections that if the market went sideways or higher over the next few weeks and VIX futures continued to come in, we would be protected against losing a lot of premium.

Let’s look at that structure and the inputs we’re using. Right now the spot VIX is around 16.80, but for the purposes of trading options in the VIX we have to look to the July futures, which are currently around 18.25.  (A big reason for the disconnect is the July 4th holiday, as Enis discussed yesterday.)

Right now the July 15/20/25 fly is about 1.90. We’d prefer to try to catch this structure at about 1.50 if we could.

Theoretical Trade : Buy the VIX July 15/20/25 Call Butterfly for 1.50

Break-even on VIX July expiration (7/17):

  • profits between 16.50 and 23.50
  • losses below 16.50 and above 23.50 with total loss of 1.50 below 15 and above 25


The way this structure works is that you’re getting long the VIX at 16.50 when intrinsically it would be worth about a dollar more (assuming VIX futures in mid 17’s).  At the current price of 1.90 for the structure, you’d be getting long the VIX at 16.90 with an intrinsic value of 3.25 (based on 1.90 vs July futures at 18.25).

What this structure does is allow some room for error on the downside while playing for a move higher in the VIX back to 20. If the VIX futures go nowhere, you pocket that difference between the structure price and its intrinsic value. That difference is the buffer you’re using for protection against a falling VIX. Your risk to the upside is basically an “all hell breaks loose” overnight scenario where the market crashes and you don’t have time to take the trade off before the VIX futures are above 25. This is very unlikely however – chances are more that you’d be able to see 20 during a trading day and close than missing out on it overnight.

Like I said, this is not something we’re putting on here but it/s an interesting structure to be slightly bullish VIX, but not at no-brainer levels like we saw in the low teens from which we traded our previous structures.