Option trader Mark Sebastian, of OptionPit.com, studies how the VIX curve is in backwardation through the August contract but explains that that doesn't mean there isn't a trading opportunity in the form of a Futures calendar. In option terms, Mark suggests a way to play August performance.

Wednesday was certainly a rough day for the S&P 500.  Like clockwork, it tested the lows from the day before, but managed to hold.  With that, the VIX exploded higher settling near 19.65.  In fact, the whole curve is in backwardation through the August contract. But that doesn't mean there isn't trading opportunity. Take a look at the front of the VIX futures curve.

chart
www.vixcentral.com
Click to Enlarge

The Lesson:

Notice that while July is above August,  August is actually below September. I think this sets up an interesting trade in the form of a futures calendar.  I would look at selling 1 July futures, buying 2 August, and selling 1 September future as a futures butterfly.  I think it could work, because August needs to move if there is another day like Wednesday, in relative terms, it's too low.  In addition, if they get a framework that will then be negotiated through the end of the month, August will be the right month to own.  If we do get a rally Thursday, July is going to tank and August, which failed to move Wednesday, in relative terms, will likely outperform.

The Trade:

In option terms, I would look at a short call spread in July versus long 1.5 call spreads in August as a way to play August performance.

By Mark Sebastian, Blogger and Contributor, OptionPit.com