This Massive VIX Trade Is Betting On Higher Volatility This Summer

| May 13, 2015 | 0 Comments

derivativesThis Massive VIX Trade Is Betting On Higher Volatility This Summer

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.

VIX is popular because it measures the volatility of the most widely followed stock benchmark in the world, the S&P 500. It’s really the only volatility index out there getting quoted in the financial press.

For a more detailed description of VIX, check out the CBOE’s main VIX page.

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.

One of the great things about the VIX for options traders is there always seems to be action in the futures and options.  Don’t forget, you can’t trade the VIX directly… just its derivatives.  There are also multiple volatility related ETFs available, but none track the VIX precisely.

To read more about VIX futures and options, follow the link.

VIX options in particular are always worth keeping an eye on.  That’s where the smart money likes to execute important trading strategies and portfolio hedges.

Here is a massive trade from this week…

One of the largest trades ever to hit the CBOE floor in the VIX happened this week.  As a point of reference, the VIX is right around 14, but has fluctuated between 13 and 15 recently.

A trader bought 180,000 July 17 calls for $1.89 while at the same time selling 360,000 July 23 calls for $0.90.  The total cost of the spread is $0.09 per spread or $1.6 million in premium.  A spread such as this is called a ratio spread, or more specifically a 1 by 2 ratio spread.

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

Here’s the chart:

large trade in VIX options, a chart of VIX

Last week, the VIX finally broke the 50-day moving average for the first time in a few months.  However, it came right back down again almost immediately afterwards.  Now, it looks like the index is making another run at the 50-day resistance line.

Basically, the trader believes we could see a higher VIX move into the summer.  Above 17 the spread starts to make money, with max profits at 23.  The spread is still profitable up to 29. But, once higher than 29, the losses aren’t capped due to the ratio style of the spread.

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

Well, if you think about it, the trade didn’t actually cost that much due to the double selling of the upside calls.  Yes, upside losses are not capped, but a sustained move above 29 isn’t likely.

Meanwhile, if the VIX does settle at 23 in July, the trader makes an absurd $108 million!  Still, the spread doesn’t have to be held until expiration, and most points above or near 17 will be profitable.  There’s a good chance we’ll see a least one spike in volatility over the next two months.

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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