One week VIX trade

[Yowster 8,003]

With the VIX spiking from 12 to 18 this week, chances look good for continued movement over the next week.  So, opened a reverse iron condor using the Dec17 options expiring next week where I am long both the 15/14 put spread and the 20/21 call spread - total cost was 0.45, so can basically double my investment if VIX moves significantly in the next week.

[Stephen 4]

Interesting trade but do not you find that after a short spike it reverts quickly back?

[Yowster 8,003]

Interesting trade but do not you find that after a short spike it reverts quickly back?

yes, and that is one of the reasons I opened this trade.  I can make money if the VIX drops to under 15 or rises to over 20 by expiration next week.

Edited December 10, 2014 by Yowster

[PaulCao 51]

Hi, 

 

I entered into a Jan/Feb. 18 and also Jan/Feb. 17 VIX calendar spread with VIX at 18 (now it's at 20); my thesis is also that VIX will drop down below 15 around January time. But I also anticipate paper loss on my current trade as VIX might keep its momentum going forward in the short-term with price of oil dropping, CIA torture report etc. 

 

Best,

PC

[Yowster 8,003]

The RIC trade with VIX Dec17 15/14p and 20/21c turned out to be a nice winner.  Since the VIX settlement price is 24.09, the 20/21 vertical call spread will be settled at 1.00 (a pre-commission gain of 122% on the 0.45 cost of the RIC).  Hopefully, some others were able to make something on this trade as well.

 

Since this was my first short-term VIX trade using options very close to expiration, one thing did occur that was kind of surprising to me.  With the VIX at 23.50 yesterday afternoon at around 3:30, I tried to close this 20/21c vertical for 0.90 and could not do it - I could only get around 0.80.   For a normal 1.00 spread that far away from my short strike, I would normally be able to close around 0.95 late in the afternoon of expiration day.  I guess the VIX has the potential to drop significantly overnight, so there still significant premium there??  I didn't want to forfeit $20 per spread in potential profit by cashing out early since there appeared to be a nice buffer in that the current VIX value was a significant amount above my short strike, so I decided to hold thru expiration (If I had a large amount invested, I would likely have sold some of it to lock in a profit).  The lesson is that to achieve anything close to full value on these VIX vertical spreads, you really have to plan on holding them thru expiration.

[PaulCao 51]

Hi, 

 

I just want to confirm what Yowster is describing about the liquidity on VIX trade, 

 

It took me two days to get out my VIX Jan/Feb 17 and 18 calendar spread with a submitted price at the mid; I was able to get 0.35 additional credit per contract from my original debit of 0.35. In the end, I think Yowster's original trade was better as it would take advantage of both VIX's rise and fall away from the median of 16-18. 

 

Luckily, provided VIX calendar spreads works on time-decay with VIX staying steady or declining, so I had the patience to get out at a good price, 

 

Best,

PC

[Kim 7,509]

The RIC trade with VIX Dec17 15/14p and 20/21c turned out to be a nice winner.  Since the VIX settlement price is 24.09, the 20/21 vertical call spread will be settled at 1.00 (a pre-commission gain of 122% on the 0.45 cost of the RIC).  Hopefully, some others were able to make something on this trade as well.

 

Since this was my first short-term VIX trade using options very close to expiration, one thing did occur that was kind of surprising to me.  With the VIX at 23.50 yesterday afternoon at around 3:30, I tried to close this 20/21c vertical for 0.90 and could not do it - I could only get around 0.80.   For a normal 1.00 spread that far away from my short strike, I would normally be able to close around 0.95 late in the afternoon of expiration day.  I guess the VIX has the potential to drop significantly overnight, so there still significant premium there??  I didn't want to forfeit $20 per spread in potential profit by cashing out early since there appeared to be a nice buffer in that the current VIX value was a significant amount above my short strike, so I decided to hold thru expiration (If I had a large amount invested, I would likely have sold some of it to lock in a profit).  The lesson is that to achieve anything close to full value on these VIX vertical spreads, you really have to plan on holding them thru expiration.

I think you described very well the potential issue with this trade. Since VIX can easily move 1-2 points when volatility is elevated, it turns out binary trade if you hold it through expiration. VIX settled at 24, but it could easily settle below 20 if the markets rallied, causing 100% loss. With those cash settled indexes, I usually don't hold through expiration. It's a bit of gambling. But getting 0.80 is still very nice gain. And sometimes you can get 0.60-0.70 early in the game on one side and wait for VIX to calm down and get some good premium on the other side as well.