Does This Giant VIX Trade Imply A Market Correction Is Coming?

| June 19, 2015 | 0 Comments

financial chartsDoes This Giant VIX Trade Imply A Market Correction Is Coming?

Savvy investors know that VIX options are always worth keeping an eye on.  It’s where the smart money tends to execute important trading strategies and portfolio hedges.  Some of the biggest trades you’ll ever see happen in the VIX options pit.

Of course, the VIX (S&P 500 Volatility Index) is a measure of implied volatility levels on S&P 500 options.  If you’re interested in options trading, you probably realize that overall market volatility is most commonly tracked by watching the VIX.

If you’re 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.

Trading volatility – or volatility products – has become extremely widespread.  It’s true for options traders of course.  But, even those traders who never touch options may still trade (or at least follow) volatility levels.

I’ve written plenty about volatility in the past, so I’m not going to rehash it here.  However, feel free to check out this article to learn more about why volatility is important.

With that being said, let’s take a look at a very interesting VIX trade 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 big money trader purchased 100,000 July 26 calls for $0.50 apiece.  That works out to a total cash outlay of $5 million.  For the trade to make money, the VIX would have to close above $26.50 by next month’s expiration.

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 recently broke above the 50-day moving average as we’ve had a bit more volatility than usual the last couple weeks.  However, the benchmark volatility index has dropped back to the 50-day average this week.

Basically, investors have been more concerned than usual about volatility in recent weeks.  However, the VIX generally continues to remain at reasonably low levels.  The big issue on everyone’s mind is what will happen if Greece exits the Euro.  Will it be a media-driven non-event?  Or, is it the next Lehman?

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

First off, this trade is a hedge against a major selloff or a market correction.  You don’t spend $5 million on a $10 out-of-the-money trade for speculation purposes (that expires in just a month).  A large portfolio manager is likely preparing in the case Greece becomes the worst case scenario.

While Greece is troublesome, I personally don’t believe we’re going to see another 2008-like meltdown.  European leaders will want to prevent this scenario at virtually any cost.  Certainly, there’s more reason for trades like this than we’ve had in the past.  But, it’s simply a tail-risk hedge and it doesn’t suggest a correction is likely, or even probable.

There’s nothing wrong with being prepared for a correction.  Yet, it also doesn’t mean you should run out and load up on far out-of-the-money calls.  I recommend prudence, as always, but I wouldn’t bet on a correction by July expiration.

Yours in Profit,

Gordon Lewis

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for  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.