Big trades clash on VIX direction

Chris McKhann (
June 6, 2014

Volatility was the big play in the option market yesterday, with differing views over the direction of the CBOE Volatility Index (:VIX) and its derivative iPath S&P 500 VIX Short-Term Futures Note (VXX).

The VIX options turned over 1.25 million contracts, led by 893,000 calls. A huge July trade made up much of that action.

optionMONSTER systems show that a block of 127,500 July 16 calls was bought for $0.68. At the same time, the same number of July 13 puts were sold for $0.49 and 255,000 July 20 calls were sold for $0.27. There was also a print of 127,500 in the September 20 calls for $0.94, also apparently sold.

Most of the action was below previous open interest but, other than the unclear action in September, this appears to be a new combination trade. The trader is betting that the VIX could be as high as 20, but not much above that, by the July expiration. Because of the credit, he or she risks nothing as long as the July futures don't dip much below 13. They closed the yesterday at 14.

The trade in the VXX, however, is looking for the volatility index to fall. A block of 25,000 June 31.50 puts was bought for the ask price of $0.97 against previous open interest of just 391, showing that it is a new position. This trade is looking for a continued drop in the VXX, which finished the day at a new record low of $31.95. The exchange-traded note faces a formidable headwind, as it comprises the two nearest-month VIX futures, which both carry premiums over the spot volatility index.

While the VIX trader is poised to profit from higher volatility, and the VXX play the opposite, it is interesting to note that both will likely be fine if nothing changes from the current situation. 

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