Is This VIX Trade As Important As It Seems?

| February 11, 2015 | 0 Comments

VIXIs This VIX Trade As Important As It Seems?

Regular readers know I like to talk a lot about the VIX and option volatility. 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 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. Often times, the biggest trades you’ll ever see tend to happen there.

Here’s an important example from this week…

On Tuesday, a trader sold 22,000 June 15 puts. The puts were sold for $0.50 a contract. With the sale, the trader collected $1.1 million in premium.

Okay, so what’s the meaning of this large VIX trade?

For reference, VIX was trading for around 17.50 around the time of the trade. That’s an elevated level compared to what we’re used to the last few years. Keep in mind, while the market has been climbing, the VIX would drop as low as 11 or 12.

Check out the chart:

large trade in VIX options, a chart of VIX

Here you can see the last year of VIX activity. Before October of last year, the price of the VIX barely even reached 18, and spikes were very short-lived. And, while the VIX is currently sitting right at the 50-day moving average, it’s still well above the 200-day moving average.

So given the recent history of the VIX, does selling puts at 15 make sense? Not to mention, this trade goes out to June expiration, so that’s a lot of risk to hold for the next 4 plus months.

Even with a floor on the VIX around 10 or 11, this trade is only a winner down to 14.50. That’s a good $4 of risk per contract if the VIX returns to recent “normal” levels at the start of the summer doldrums.

So, why do this VIX trade?

Make no mistake, selling 22,000 VIX puts in a huge trade. As such, it’s likely an institutional trade. That means it’s worthy of our attention.

My guess is someone believes there’s a new normal in the VIX. Volatility levels have remained elevated so far in 2015 (compared to previous years). This put sale is suggesting those elevated levels are going to stick around for the next several months.

Global economic risk is still high… and will remain high for the foreseeable future. It’s not too surprising that some traders feel this could keep the VIX at higher levels than in the recent past.

I’m not sure I would do this particular trade myself. However, it’s important to take note. And, the “normal” level of the VIX in the coming weeks certainly deserves a close eye.

Yours in Profit,

Gordon Lewis

Options Trading Research

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.