We went over our VIX sturcture yesterday (below) and with the market down this morning and the spot VIX back over 20, the structure is trading about $2. So from a risk/reward perspective it makes sense to take a little money off the table here.
ACTION: Bought to close half the VIX ($20.20) Feb 14 Puts, sold to close half the Feb 16/20 Call Spreads at 1.90 (paid even money)
– Bought to close Feb 14 put for 10c
– Sold to close Feb 16 call at 3.55
– Bought to close Feb 20 call at 1.55
If you wanted to free up margin and take off the downside risk of the trade, the entire Feb 14 put line can be closed with the proceeds of the call spread sale, leaving half the call spread but no short puts.
In December we re-initiated our go to VIX portfolio protection trade with the spot VIX around 13.33. With the recent selling in the market and the spot VIX flying higher than 20 yesterday, its a good time to look at the trade and see how it’s shaping up. To recap, here’s the trade from Dec 19th:
TRADE: Sold the VIX ($13.33) Feb 14 Put to Buy the Feb 16/20 Call Spread for Even Money
-Sold 1 VIX Feb 14 Put at 0.65
-Bought 1 Feb 16 Call for 1.40
-Sold 1 Feb 20 call at 0.75
With the spot VIX at about 18.75 and the Feb VIX futures just a little lower than that at 18.25, we’re starting to see the two converge, which will accelerate into expiration on the 19th. With Feb futures at 18.25 this structure is worth about 1.50 mark to market. Since the long strike is 16, intrinsically this trade is “worth” about 2.25 at the moment.
So what we have is a few moving parts on this trade right now. We have the spot VIX, which is dragging the futures around (lately higher, today slightly lower), we have the convergence of the spot and the Feb futures, which increases as we approach expiration, and then we have the intrinsic/extrinsic relationship of that call spread (and short put) which will also converge as we approach expiration.
So what we’re looking for as far as an exit is to time it well. The longer the spot VIX spends in the high teens, the higher that Feb future will stay. The ideal situation is for the VIX to expire at or above 20 on the 18th, but barring that, we’ll have to decide at what point we’ve squeezed the most out of the trade as we’re going to get without alot of risk of losing profits.
If the selling in the market continues, it’s pretty easy to see a chance of the spot VIX back above 20. If yesterday was the lows for now (in equities), we’ll have some time to decide on the structure as the extrinsic to intrinsic relationship should be enough to cover the VIX futures pulling back a little. (With 1.50 price now, we have room down to 17.50 in the VIX to get out for the same price at expiration)
Hovering above all of this is the NFP (JOBS!) report on Friday, which usually sees rising then falling vol around the number. We’re well aware of that fact, and will act accordingly if we feel the structure is at risk of a VIX collapse following the report.
We tend to take a little off of this structure on the first vol pop, and in the past we’ve used profits of a sale to cover the entire short put which also frees up margin. We’ll likely do the same at least before Friday.