On December 2nd we looked at a way to buy a very low VIX with eyes towards today’s FOMC release. The meeting has come and gone and the market is selling off a bit in response so I wanted to check in on the trade idea for management purposes. First, here was the original trade structure:
*VIX ($14) Sell the Dec 13.5 put at .55 to buy the 17/22 call spread for even money
- Sell 1 Dec 13.5 put at .55
- Buy 1 Dec 17 call for .95
- Sell 1 Dec 22 call at .40
And here was how we detailed the risk to the trade:
The risk to the downside is if the VIX settles below 13.50. That’s impossible to quantify exactly how much risk there is, but the VIX rarely trades below 10. The most likely scenario is that this is risking about 1.50 if the VIX settled at 12. It has not settled (monthly) below 12 since last Summer, and even this past August, when vol felt historically low its lowest (monthly) settlement was 12.20.
So 12 is about right for the risk (meaning 1.50 at risk). And with the Dec VIX futures currently around 15, you have some time to close this if that 13.5 strike starts to look like it’s at risk (by watching the Dec VIX Futures)
The spot VIX has been pretty low, even into the FOMC release as the market kept making new highs. Currently, the spot VIX is about 13.20 with the Dec futures a little higher at 13.50. What that means is the trade is right at a point where it could lose money if the VIX settles below 13.50 on expiration (next Wednesday on the open, Dec 21st).
Right now, mark to market it can be closed for about .60 debit (vs the even money initiation). That is wise for those looking to roll this out to January or beyond as a vol bet. The other option is to see if today’s selling has a follow through in the next few days as then it would be more likely that it could be closed (or rolled) for no loss or it simply settles above 13.50 next week. The 17 strike for the long call is unlikely at this point unless the market sell-off became a little more fierce. This is a trade that makes sense to have on with the VIX so low into the change of the calendar to 2017, so we’ll check back in in the next few days with strikes and expiration for that sort of roll.