VIX Expiration Thoughts

March VIX options expired today with a settlement price of 16.68. Though the fear index gave a valiant effort in trying to remain elevated long enough for the naked put play mentioned in last week's Fading Complacency post to come out profitable, the incredibly low realized vol of the market won out in the end. With both 10 and 21 day historical volatility sub 10% on the SPX index and continuing to decline, it was simply a matter of time before the VIX caved in and became more in line with the day to day movements of the market.

We mentioned shorting the March 18 put for $.50. This placed the expiration break even for the trade at $17.50. With the settlement price coming in at $16.68, the trade would have lost $.82 had you held to expiration. If you exited early you could have easily locked in some type of profit or at least broke even. At one point over the last week the puts were trading at $.20. Within my own account, I ended up just buying them back yesterday at $.50 to break even.

This month's settlement illustrates why I don't usually hold these naked put plays into expiration. With the overnight gaps that can occur in the SPX and settlement being calculated off of the opening prices, you never really know what you're going to get. Tack on the fact that the naked puts weren't even profitable the day before expiration and you really don't have much of a reason to take the gamble of holding.