Continuing The VIX Spike Spread Saga

The Feb Position Rolled To March Last Week

First, apologies on how late this is being posted, it’s finals week for IU MBA students, my dog has been sad so I spent lots of time on the couch consoling her, and I have been spending too much time looking in the sky for balloons.

Anyway, back in early December I was asked about setting up a trade that could benefit if we get a spike in VIX over the following six months. This inquiry came as I was a guest on the Option Insider Network’s Pro Q&A. My favorite trade structure around this outlook is to sell a VIX put spread and purchase and out of the money call with the net cost close to 0.

The first trade sold the VIX Dec 18 / 21 put spread and purchased the 27 call for a net credit of 0.07. We roll these trades on the Friday before VIX expiration, which was December 16. The exit trade resulted in a cost of 0.06 which is basically break even.

We altered the structure on the second trade which uses January VIX options. We sold a put spread and purchased an out of the money call spread instead of just purchasing a call. This decision was based on the spread between the Jan VIX future and spot. Specifically, the trade sells the VIX Jan 20 / 23 put spread and purchases the VIX Jan 26 / 33 call spread for even (no cost / no credit). This part of the trade did not work too well as VIX was under 20.00 when it was rolled to February. The exit resulted in a loss of 2.80.

Trade number three sold the VIX Feb 17 / 20 put spread and purchased the 23 call for a net credit of 0.05. The exit day for this trade was last Friday, February 10, and in that case the VIX Feb 17 put was bid for a 0.01 so the only legs that could be exited involved selling the VIX 23 call for 0.30 and purchasing the VIX Feb 20 put for 0.45 resulting in a cost of 0.15 and a loss of 0.10 on the February leg. At this point the cost of this hedging program is at 2.90.

We now roll (again) to March for leg four of this trade. VIX was at 20.50 and the March future at 22.00 we chose to sell the VIX Mar 21 put for 1.80, buy the VIX Mar 18 put for 0.45, purchase the VIX Mar 24 Call for 1.90, and then selling the VIX Mar 33 Call for 0.70 resulting in a credit of 0.15. The potential payoff if monetized on various the dates shows up below.

The payout above uses hypothetical data from each Friday leading up to March expiration. Also, we chose to sell the 33 call in addition to the short put spread and long call to add to the credit that helps pay for the long call. VIX moves to the upside in 2022 only reached the mid to high 30’s so we felt the tradeoff of limiting the upside to the trade was worth having a lower strike price for the long call.

So again, we watch. If VIX reaches the 30’s we will monetize the position, otherwise if the VIX spike does not arrive, we will report back on St. Patrick’s Day on the next rolling trade, that is unless my dog gets super needy again.