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Time To Catch A Volatility Butterfly?

There are many strategies to gain from volatility whether one considers directional bets or those that can benefit from futures curve strategies.

Late last week the CBOE Volatility Index saw a meaningful reversal to the upside as evidenced in the chart below.


As a result of the upward spike in the volatility index price, the associated futures curve for CBOE VIX saw an upward shift. The shape of the curve may present what may be an interesting short term trade opportunity to engage in a Butterfly strategy that would go Long 1xFeb-12, Short 2xMar-12 and Long 1xApr-12 contracts.

In short the trade succeeds if the curve becomes less concave implying that the relative gain of the Long wings is greater than that of the twice Short torso of the strategy.

Source: Point Guard Capital LLC and CBOE

As one can see the curve is steepest at the front end of the curve presenting the opportunity to engage in a Butterfly strategy. The one-month static roll yield is -7.64% between Feb-12 and Mar-12 contract based on settled value as of 2/10/2012.

Note that the trade duration is relatively short term (3-days as we near settlement of the nearest contract on 2/15/2012). If there was more of a shelf life there could be the potential to gain from roll yield and having a close to "market neutral" position in the underlying instrument.

Only investors with a short-term and high risk appetite need apply such a strategy. There may be other opportunities that present themselves over time that may have a longer shelf life. However, it may behoove one to at least set up a relevant screen that may help track similar curve opportunities.

This article is mainly for informational and educational purposes only and should not be interpreted as an offer or solicitation to buy or sell any securities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: The opinions or views presented in this article are those of the author only and may or may not be shared by Point Guard Capital LLC. The content is meant for information and educational purposes only and should not be interpreted as an offer or solicitation to buy or sell any security or derivative or other investment instrument. Each investor should conduct their own thorough due diligence and ensure that any investment or strategy is suitable and seek professional advice.