Considering Our Options – $VIX: Small Vol Crawl

by Enis September 11, 2014 1:21 pm • Commentary

Sept VIX expiration is on the opening on the morning of Wednesday, Sept. 17th.  That also happens to be the day of the FOMC meeting.  VIX spot has been moving somewhat higher this week even though realized volatility has remained subdued in the S&P 500 index.

My VIX trade from late June is coming down to the wire.  To recap, here was the initial structure:

TRADE – Sell the VIX (11.96) Sept 13 put and buy the Sept 15/19 call spread for a 0.10 debit

– Sell 1 Sept 13 put at 0.65

– Buy 1 Sept 15 call for 1.50

– Sell 1 Sept 19 call at 0.75

This structure is worth around 0.05 at the moment, so essentially flat from initiation, as Sept VIX futures are currently trading 13.90, nearly at the midpoint between the short 13 put and the long 15 call.  As for VIX spot, it has been in a tight range in the past month, and I’ve marked the 13 and 15 levels on the 1 year chart:

VIX spot daily chart, courtesy of Bloomberg
VIX spot daily chart, courtesy of Bloomberg

Back in early August, CC discussed in a COO post the nature in which this sort of VIX structure changes in value, both over time and as the VIX futures term structure moves around.  It’s well worth a read for its educational value regarding how VIX options move.  In any case, at the time, the structure was only worth a bit more even though VIX spot was a in the high teens:

Right now the spot VIX is checking in at around 16. The September futures are trading about 50c less that spot at the moment. Our structure is trading around 50c, which is intrinsic to where the futures are and 50c below intrinsic to the spot.

This trade would have worked out quite well if that sort of VIX move had happened a few weeks later, closer to expiration.  At this juncture, it’s relatively binary, so we are looking to exit the trade prior to Wednesday morning’s settlement if there is any worthwhile pop in the next 3 trading days.  Given the bid to VIX futures even on an unchanged day like today, it does seem like traders are more willing to bid up volatility ahead of next week’s FOMC.  As a result, we are not in a rush to get out today.