Interesting Mix Of VIX Options For Long Vol Exposure

Trade Of The Day For January 18, 2024

One of our favorite trades to get long VIX exposure is selling a put or a put spread to pay for a long call. Another variation is selling a put and buying a call spread. However, we came across a trade that follows the same concept, but instead of a call spread, the long VIX exposure is a ratio spread. Details follow.

Early this morning, with VIX at 14.48 and the March VIX future trading at 16.05 a trader came into the market with an interesting variation on selling options to pay for some upside exposure. Specifically, they 250 VIX Mar 13 Puts for 0.29, bought 250 VIX Mar 14 Calls for 2.79, and then finished the spread by selling 500 VIX Mar 21 Calls for 1.05. The net result of selling 1 Mar 13 Put, buying 1 Mar 14 Call, and then selling 2 VIX Mar 21 Calls is a cost of 0.40. An estimated payoff at February expiration and final payoff at March expiration appear on the payoff diagram below.

We chose to include a payoff on February 14, which is expiration for February VIX futures and options, to show potential levels if VIX reaches the 20’s before March expiration. The payoff is about 2 points in February if VIX reaches the low 20’s, a figure that rises to over 6 points as March expiration approaches. Note a VIX run to the high 20’s results a situation where, despite intended long VIX exposure, this trade would be in the red. Unless a large gap in VIX and the March VIX future occurs, it is likely this trader would exit the trade before reaching the upside break-even levels. Of course, there is also down-side risk if VIX returns to the tweens.