TRADE IDEA: VIX MAY 18TH 19 SHORT/SEPT 21ST 21 LONG CALL
This is a call diagonal that (at least currently), you would put on for a small net credit so that in the event price rips drastically away from the setup, you aren't out much.
This particular VIX setup doesn't usually work well because we're in contango the vast majority of the time, and this generally makes the back month long cost too much relative to what you're receiving for the front month short. Currently, however, we're in an unusual term structure situation where there really isn't much difference between the /VX May futures contract (currently trading at 19.34) and the Sept (currently trading at 18.10). In fact, we're in backwardation, where the back month is trading lower the front month, allowing us to set this up for a small net credit.* Because of that, any profits you realize will be via rolls of the short call to bring in additional credit; merely allowing the setup to go to max profit (which would occur on a finish below 19) without rolling will net you jack diddly squat, since you'll be putting this on for a .05 or .10 credit, tops.
Ideally, you will roll the short call aspect out for duration on strength, since this is a mean reverting instrument. However, if price does break through the short strike, you'll be merely rolling the short call out in time "as is."
Although counterintuitive (since it's below spot), the spread is setup around where the May /VX contract is currently trading.
* -- Assuming the term structure is like this at Monday open.
This particular VIX setup doesn't usually work well because we're in contango the vast majority of the time, and this generally makes the back month long cost too much relative to what you're receiving for the front month short. Currently, however, we're in an unusual term structure situation where there really isn't much difference between the /VX May futures contract (currently trading at 19.34) and the Sept (currently trading at 18.10). In fact, we're in backwardation, where the back month is trading lower the front month, allowing us to set this up for a small net credit.* Because of that, any profits you realize will be via rolls of the short call to bring in additional credit; merely allowing the setup to go to max profit (which would occur on a finish below 19) without rolling will net you jack diddly squat, since you'll be putting this on for a .05 or .10 credit, tops.
Ideally, you will roll the short call aspect out for duration on strength, since this is a mean reverting instrument. However, if price does break through the short strike, you'll be merely rolling the short call out in time "as is."
Although counterintuitive (since it's below spot), the spread is setup around where the May /VX contract is currently trading.
* -- Assuming the term structure is like this at Monday open.
