A little over a week ago, we placed a bet on the VIX that was predicated on the fact that with all the uncertainty around events in September that the VIX would effectively have a floor on it into expiration and wouldn’t take much for a pop into the high teens. We’ve gotten a bit of a pop now, attributable to what I mentioned before combined with the threat of military action in Syria. With the spot VIX now above the 17 level, and the one month futures even higher, our spread is now in-the-money intrinsically and has a nice profit mark to market so far. To recap, here’s the structure:
TRADE: Sold the VIX (14.70) Sept 14 Put to Buy the Sept 17/20 Call Spread for Even Money
- Sold 1 VIX Sept 14 Put at 0.44
- Bought 1 Sept 17 Call for 1.06
- Sold 1 Sept 20 call at 0.62
With the 1 month VIX futures around 17.70 the trade that we put on for even money is trading 70c, or just about its intrinsic value. That puts us in a good spot and any further pop in the futures would probably be a good spot to take off at least half of the trade. There is very little risk on this trade other than losing the mark to market profits at this point (it’s very unlikely that the VIX will close under 14 on Sept 18th.) So our strategy will be to look to take some off, maybe when its worth a dollar or more, and depending on how the market looks, possibly let the remainder of the trade ride closer to expiration. If the selloff reverses course and it looks like the VIX could settle in below 17, we’d look to rethink the strategy and possibly take the entire trade off for a nice profit, but below where it’s marked now.
I love this structure and love the fact the we were able to put it on for an expiration with so many events that could keep the VIX bid. This structure also makes for a great portfolio hedge during times of uncertainty as it’s very little risk for what could be great protection in a protracted selloff that would see the VIX above 20. You may have noticed this already but you can expect to see some form of this trade as a regular feature on Risk Reversal.