Big Time VIX Trades Could Mean Volatility Is About To Decrease

| September 11, 2015 | 0 Comments

volatilityBig Time VIX Trades Could Mean Volatility Is About To Decrease

The VIX continues to generate plenty of financial news as it remains elevated above normal levels.  Volatility has started to settle in recent days, but don’t expect a complete capitulation until after the next Fed meeting.

As a reminder, the VIX (S&P 500 Volatility Index) is a measure of implied volatility levels on S&P 500 options.  As many of you know, the VIX is often considered the market’s fear gauge.  Overall market volatility is most commonly tracked by watching the VIX.

For those who are interested in learning more about the VIX, the CBOE VIX mini-site has a ton of valuable information on the index.  Follow the link if you want to learn more.

There’s been renewed interest in volatility and volatility products since the correction at the end of August.  Regardless of whether you’re interested in trading volatility ETFs or VIX options (or futures), the benchmark volatility index is always worth keeping an eye on.

I’ve written a lot about volatility in the past, and you can check out this article to learn more about why volatility is important.

Now, let’s take a look at interesting VIX action from this week.  It could give us some clues as to what to expect from the market over the next few weeks.

Here’s the deal…

A massive amount of VIX September call selling occurred this week.  Specifically, a trader sold 20,000 September 22 calls, 20,000 September 23 calls, and 50,000 September 27 calls.  These sales happened with the VIX roughly around 25.

That means 40,000 of the calls were in the money and 50,000 were out of the money, but still held plenty of value.  Here’s the best part – the trader generated $25.7 million in cash from the sales!

Okay, so what’s the story with this VIX trade?

Here’s the chart of the VIX:

large trade in VIX options, a chart of VIX

The VIX is still trading well above the 50-day moving average and nowhere near the lows of the year.  Even at 25, the VIX is very clearly elevated compared to where it’s traded for much of the last year.

The trader behind the large September spread is likely betting the VIX is going to sell off by the end of September.  It could potentially make a run at the 50-day moving average before expiration.

So, given the recent history, how likely is it this VIX trade will be a winner?

Well, if we looked at it like an opening trade, it does make a lot of sense.  The VIX has been very elevated, and will probably remain high until after the Fed meeting (and interest rate decision).  Afterwards, it’s highly likely volatility will drop sharply.

However, in this case, the trader is likely cashing out on profitable trades… well, very profitable trades.  Still, this trade doesn’t happen unless the trader feels the VIX is done moving higher.  Once that happens, reverting to the mean is a very strong possibility in the near future.

Yours in Profit,

Gordon Lewis

Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Volatility Watch

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

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