VIX is getting interesting, reaching the low end of its 52 week range. The market is taking a "not IF, but WHEN" attitude toward rate cuts, while corporate profits appear to be rising.
Conditions are similar to January 4, when I sold a hundred options of 12 / 12.50 bull call spreads for $0.43 with the VIX at 14.13. These expired for a $0.50 credit on 2/14, a quick 16% return in under 1.5 months.
The deal is even more juicy today with the VIX at 12.69. The same spread expiring June 18 sells for $0.41 at the mid. That would represent an almost 22% return. The difference between now and then which accounts for the better pricing is the lower VIX.
But what exactly does the VIX today have to do with the VIX in 1.5 months? Not a lot I would argue, based on the chart. There is a pattern where a high VIX can only fall at a certain rate and down to a certain level around 10, but other than that it looks very noisy.
I downloaded
5 years of VIX data from Yahoo Finance and found that the VIX has only closed below 12.50 on 2.37% of days. The 12.41 breakeven point on this trade occurred only 1.67% of the time. However, the 5Y historical probability of a loss on this trade (VIX<12.41) 40 trading days after the VIX fell below today's 12.69 was 3.9%. A total loss occurred 0% of the time.
Certainly the partial losses on spreads can be substantial, but with VIX the probability decreases of the underlying landing at successively lower closes. I.e. VIX at 12.41 is a lot more probable than VIX at 12.25 which is itself a lot more probable than VIX at 12. I'd have to create some sort of probability-weighted function to arrive at a fair value for this bet, but intuitively a 96% chance of a 16% return looks good, despite the 4% chance of significant loss.
