New Trade – $VIX: Marching into the Next FOMC

by CC February 21, 2014 9:56 am • Commentary

With our most recent long VIX futures strategy now closed it’s time to look out to see if we can place this trade again. We like to isolate months with major economic or policy events because when these coincide with that month’s futures settlement we see an asymmetric risk reward on the VIX as it will tend to stay bid into that event.  Thus, we only need one vol spike in the market between now and then to close the position.  

With that in mind, given the string of weak macroeconomic data over the past month, the market is now laser-focused on the next FOMC meeting which is March 18th and 19th.  While many are blaming the cold weather for the poor data, market participants are anticipating more dovishness from the FOMC after 2 weak jobs reports.  The Citigroup Economic Surprise index for the U.S. is now negative for the first time in 3 months:

[caption id="attachment_36516" align="alignnone" width="600"]Citigroup Economic Surprise Index for the U.S, Courtesy of Bloomberg Citigroup Economic Surprise Index for the U.S, Courtesy of Bloomberg[/caption]

The weakening economic data has been ignored by the market given the expectation of Fed support.  But if hawkish commentary from the Fed continues, as we’ve seen from many governors over the past couple weeks, even with the weak data, then another vol spike in the next month might be in the cards. The March VIX futures expiration once again coincides with the FOMC meeting.

Again, this strategy works well as an outright trade but works really well as a portfolio hedge as it takes some of the sting out of any selloffs in the market between now and expiration.

TRADE – Buy to open the VIX (14.40) March 14 – 15/19 call spread risk reversal for even money

– Sell to open 1 March 14 put at .55

– Buy to open 1 March 15 call for 1.00

– Sell to open 1 March 19 call at .45