Name That Trade – $VIX Vapors

by CC May 18, 2015 3:54 pm • Commentary

The spot VIX is low today, checking in at at around 12.50, up on the day due to the Monday effect. Actual volatility of the market is nearly non-exsistant recently with the 30 day historical (realized) vol in the SPX around 10 (blue):

Screen Shot 2015-05-18 at 3.46.25 PM

When the VIX gets this low we like to think about long volatility trades in the options. Right now the June 14 15/20 call spread risk reversal is about a 5 or 10c debit. What that means is that if the VIX settles on June expiration above 14 and below 15, you lose the 5 or 10c risked. Below 14 you are risking 14 minus the settlement price. Theoretically the risk is to zero but in actuality the risk is probably closer to about 2, since it’s unlikely we see the VIX below 12 on settlement day:

Screen Shot 2015-05-18 at 3.50.55 PM
2 year VIX from LiveVol Pro

This is a trade we may put on in the next couple of days. Ideally we’d like to do it for even. At that point we’re essentially risking 2 to possibly make 5 on the 15/20 call spread if the VIX is at or above 20 on expiration. Stay tuned, we’ll check back on this idea later this week.