Bearish VIX Jan Put Ratio Spread Taking Advantage Of Future Premium To Spot
Trade Of The Day For January 4, 2024
VIX has creeped higher this week, rising from the 2023 settlement level of 12.36 to spend some time over 14.00. As VIX has moved up, the futures have maintained a decent premium to the spot index. This price action creates opportunities that are unique to the VIX complex. A trade using January VIX puts this morning will benefit from an unchanged to slightly bearish move in the spot index between now and January 17 expiration.
With spot VIX at 13.94 and the January future at 14.50 a trader purchased 1000 VIX Jan 17th 14.50 Puts for 0.83 and sold 2000 VIX Jan 17th 13.50 Puts for 0.31. The result is a cost of 0.21 for this slightly bearish ratio spread.
Note both the index and future prices at time of execution are highlighted on the payoff diagram above. The better underlying for valuing a VIX option is the future that shares an expiration. However, the options will settle into to the spot index, using an AM settlement process. If spot VIX remains in the 13 to 14 range, this trade will yield a profit as the future price drifts closer to the spot market with expiration approaching.