Is This Large VIX Trade Signaling An End To Investor Fear?

| June 26, 2015 | 0 Comments

VIXIs This Large VIX Trade Signaling An End To Investor Fear?

There’s a reason the VIX is often called the investor ‘fear gauge’.  The benchmark volatility index is often the first place to see when investors start increasing the hedges on their portfolio. Of course, hedges tend to increase along with investor concern over a market selloff.

As a reminder, the VIX (S&P 500 Volatility Index) is a measure of implied volatility levels on S&P 500 options.  Broad 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 often written in the past about volatility and options trading.  Feel free to check out this article to learn more about why volatility is important.

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 trader sold 75,000 July 17 calls for $0.61 apiece.  That works out to more than $4.5 million in premium collected.  The trader will be able to retain the entire premium if the VIX closes below $17 by July expiration.  Breakeven for the trade is at $17.61.

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 has been trading within range of the 50-day moving average for the past couple months.  The index hasn’t been able to pull away from the important moving average line in either direction.

As you can see, the VIX hasn’t spent much time above $17 in the last couple months.  The trader is basically betting the same will be true for the next month.

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

As a general rule of thumb, selling out-of-the-money calls on the VIX is going to pay off.  It’s a trade strategy with a high probably of success.  However, it’s also a trade that carries a significant amount of risk.

Keep in mind, when the VIX spikes, it tends to spike hard.  It would be very easy to lose one’s shirt on a short call trade in less than a day.  Going short VIX calls in definitely not for the faint of heart, but it can pay off big.

This trader likely believes the Greece situation won’t devolve into chaos.  He or she feels confident volatility is going to trade mostly sideways over the next month.  That’s usually a good bet this time of year, especially with a holiday week coming up.  Still, trades like this carry a heavy amount of risk and should generally be left to the professionals.

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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