The spot VIX has seen a decent pop the last few days coming off its Thanksgiving week lows. Because of that it’s a good time to take a look at our VIX trade and how it’s setting up into its expiration on December 18th. To recap this is a structure that we love to put on when the VIX is low and we can look out to some market uncertain events that coincide with expiration chosen. In this case, we initiated a trade when the VIX was 12.90, using the Dec expiration because it once again coincided with a FOMC release day. Additionally, we have the non-farm payrolls this Friday which always gets everyone talking about Tapers and what not. To recap, here’s the rationale we initially laid out:
Lo and behold, December VIX expiry is on December 18th, which is once again a FOMC release day. Everything we discussed in our September trade rationale applies for December VIX futures as well. In the case of the September trade, the Fed decided not to Taper and the VIX got crushed as the market made a new all time high, but since our VIX trade expired in the morning, we ended up with no loss / no gain, no harm, no foul, and a great risk/reward trade in the case that the VIX had rallied ahead of the event.
One main difference is that the Taper anticipation/expectation for December is significantly lower than it was for September. However, the entry price for the VIX structure with VIX spot below 13 is favorable enough in our view to compensate for that difference.
This is a great trade for portfolio protection since there is no initial premium outlay, but the chance for a nice gain on a swoon is evident. It also works as a purely speculative trade because the risk of a VIX settlement significantly below 14 is minimal with the FOMC event.
And here’s the trade from Nov 12th:
TRADE: Sold the VIX (12.90) Dec 14 Put to Buy the Dec 15/18 Call Spread for Even Money
- Sold 1 Dec 14 Put at .60
- Bought 1 Dec 15 Call for .1.15
- Sold 1 Dec 18 Call at .55
Mark to market this trade became a loser with the VIX getting crushed into Thanksgiving but it wasn’t something we worried too much about because we saw that VIX crush as temporary knowing the NFP and FOMC was right behind the holiday break. The real risk of this trade is if the VIX settled significantly below 14 on the 18th. Today, the spot VIX is just under 15, and the Dec futures in the VIX are just about where the spot VIX is trading.
We like the setup here not only because of the economic calendar but also because the market is finally showing a little weakness from its recent highs. Any follow through in this selloff and the VIX could be well through our long call strike of 15. If the market doesn’t follow through to the downside and the VIX comes back in slightly, we still have that FOMC release to lean on which should keep the trade from becoming a loser on the 18th.