This Large VIX Trade Isn’t What We’re Used To Seeing

| May 22, 2015 | 0 Comments

VIXThis Large VIX Trade Isn’t What We’re Used To Seeing

VIX options are always worth keeping an eye on.  That’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.  As you probably know by now if you’re interested in options trading, 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, 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.

Okay, so with all that being said, let’s take a look at a very interesting and unusual VIX trade from this week.  It could give us some clues as to what to expect from stocks over the next few weeks.

Here’s the deal…

A trader sold 25,000 June 15 calls AND June 15 puts simultaneously for $2.35.  This type of trade is called a straddle.  The max loss is unlimited (if the VIX moves a lot by June expiration).  The max gain is the premium collected, or $2.35 per straddle.  That works out to just under $6 million collected if VIX expires at 15 on June expiration.

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

Here’s the chart from the day the straddle trade occurred:

large trade in VIX options, a chart of VIX

Looking at the 50-day moving average on the chart, the VIX has clearly been trending lower.  The index briefly spiked above the 50-day line in early May, but has fallen all the way back below $13.

Here’s something important to keep in mind.  With the straddle, the trade makes money if the VIX closes between $12.65 and $17.35 on June expiration.  That’s a big range.  And, even though the VIX is well below the max gain point of 15, it’s still well within the profitable range on the spread.

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

The chance this trade ends up in the profitable range is highly likely.  Moreover, the trade suggests the VIX may even climb above the 50-day moving average.  However, the upside is capped at a little over $17.

Meanwhile, the VIX may not remain at 52-week lows over the next month or so.  But, it still could easily stay at low levels (under $13.50) with the straddle still making money.

Generally speaking, if this trader is correct, we may see a small bump in market volatility over the next month.  However, it’s likely to remain relatively low and near the 50-day moving average.  And, the upside is likely capped.

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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