More downside see for volatility fund

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The VXX volatility exchange-traded fund is not far off the all-time low reached earlier this week, and a large option play today is positioning for further downside.

The iPath S&P 500 VIX Short-Term Futures ETN is down 1.34 percent to $30.26 in midday trading after hitting a lifetime low of $28.81 on Monday. After two reverse splits, the fund started out at $1,600 back in February 2009. It is down 50 percent just since late July.

The big trade in the fund is in the January 2014 25 puts. A trader bought 5,000 of those options for $5.75 in volume that was more than 10 times the open interest and therefore a new position.

The put buying is betting on more downside in the VXX, which has several structural issues that tend to add to its decline. While many traders believe that it tracks the spot VIX, the fund is actually composed of the two nearest-month VIX futures. Those futures usually carry a premium to the volatility index and tend to trade in contango, meaning the second month is more expensive that the first.  (See our Education section)

The implied volatility of those puts is 74 percent. The 30-day historical volatility is at at a four-month high of 63 percent, and the 10-day reading is just 36 percent.

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