The VIX has spiked with this week’s market selloff combined with worries over the Ukraine referendum and China economic data. We’ll take this opportunity leading into the weekend’s Crimea news to close the structure and look to roll it in the coming days or weeks:
ACTION – Sold to close VIX ($17) March 14 – 15/19 call spread risk reversal at 1.75 for a 1.75 profit
- buy to close 1 Mar 14 put for .05
- sell to close 1 Mar 15 call at 2.40
- buy to close 1 Mar 19 call for .60
New Trade – $VIX: Marching into the Next FOMC, February 21, 2014
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:
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