This VIX Trade Could Be A Big Deal

| March 13, 2015 | 0 Comments

option tradersThis VIX Trade Could Be A Big Deal

As an options trader, you can’t understate the importance of volatility.  It’s one of the primary ingredients in the price of an options contract.  Perhaps more importantly, volatility levels can give us an idea of investor concern.

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

Of course, overall market volatility is most commonly followed by watching the VIX.

As a reminder, the VIX (S&P 500 Volatility Index) is a measure of implied volatility levels on S&P 500 options.  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.

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.

To get an idea of just how popular VIX products are, the average daily volume for VIX options was a whopping 632,419 in 2014.  That’s per day!  To get an even better idea of the numbers, look at the VIX options and futures page here.

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

Here’s an important example from this week…

This week, a big trader bought around 50,000 VIX April 24 calls.  The calls were purchased for $0.80 a contract.  As such, the total cost of the trade is $4 million – quite a chunk of change.

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

The VIX was trading a bit over 16 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

Here you can see the last year of VIX activity.  The benchmark volatility index isn’t quite ready to return to typical bull market levels.  However, the index wasn’t able to break the 50-day moving average this past week.

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

Keep in mind, $4 million is a ton of cash to spend on an out-of-the-money VIX call trade with about 6 weeks to go to expiration.  The VIX hasn’t been above 24 since last October.  And that was only for a very brief period.

There are basically two possibilities.  On one hand, the trader may believe some macro event is going to cause volatility to spike.  Perhaps it’s a belief the Fed is going to raise interest rates at the next Fed meeting.

On the other hand, this trade could be a very large hedge against a long stock position.  Many investors believe VIX calls are as good or better than S&P 500 puts for hedging purposes.  They are certainly becoming more and more popular as a hedge.

Regardless, large VIX trades like this are worth watching.  A lot of smart money trades in VIX options, so it definitely should not be ignored.

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.