This Unusual VIX Trade Is Worth A Second Look

| April 17, 2015 | 0 Comments

implied volatilityThis Unusual VIX Trade Is Worth A Second Look

As I like to regularly point out, as an option trader, you should always be keeping an eye on what the VIX is doing.  Even if you’re not a volatility trader, the VIX should give you an idea of how cheap or expensive options are on a relative basis.

Keep in mind, the VIX (S&P 500 Volatility Index) is the most popular way to measure option volatility.  In terms of getting a snapshot of what volatility is up to (and how concerned investors are), you can’t do much better than glancing at VIX levels.

Is there fear of a selloff?  Volatility and the VIX is the best gauge we have of uneasiness in the market.

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

As I’ve written before, the VIX isn’t a tradable instrument, so VIX options and futures are often the way to go for volatility traders.  Both derivatives are used often by institutions for hedging or speculating on future volatility.  There are also multiple volatility related ETFs available, but none track the VIX directly.

To read more about VIX futures and options, check the page out here.

One of the interesting things about VIX options is they tend to draw in some really big trades.  In fact, the biggest options trades you’ll ever see tend to happen there.

Here’s an important example from this week…

This week, a trader bought over 30,000 VIX May 19 and May 23 calls over a couple days (in large blocks).  When same month calls (or puts) are purchased at the same time, it’s called a call (or put) stupid.

The total cost of the trade is $1.14 combined for both calls.  That makes the total cash outlay close to $3.5 million.

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

The VIX was trading a bit over 15.50 at the time of the trade.  That’s not a high level overall, but it’s higher than we’re used to seeing during the current bull market.

Check out the chart:

large trade in VIX options, a chart of VIX

Over the last year, the VIX has generally been under 15.  The upwards spikes don’t tend to last for long, with the exception of the December through February period.   Lately, the index has remained below the 50-day moving average.

So, given the recent history, why do this VIX trade?

Keep in mind, $3.5 million is a ton of cash to spend on an out-of-the-money VIX call trade with just a month to go to expiration.  The VIX hasn’t been above 19 (much less 21) since earlier in the year, when more risk was clearly present.

Given the calendar ahead, and the short-time frame of these options, my guess is this is a hedge.  If the VIX climbs to around 20, the trade breaks even at expiration.  Anything higher would start producing sizeable gains in a hurry.

If you think about, it’s not a lot to spend for 4 weeks of protection against volatility.  VIX calls can be an excellent hedge against long portfolios.  Sometimes, you can get more bang for your buck with a VIX hedge than you can with index puts.

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.