Volatility fund faces big put spreads

optionMONSTER

The VXX volatility exchange-traded note tumbled to a record closing low yesterday amid heavy option activity.

The iPath S&P 500 VIX Short-Term Futures ETN saw more than 454,000 options change hands, according to optionMONSTER systems. Puts outpaced calls by almost 2 to 1 as traders played the downside in the fund and its underlying futures.

The first large trade came when 15,000 June 19 puts were bought for the ask price of $0.93 and the same number of June 17 puts were sold for $0.46. The trade was done again in the afternoon in the same volumes for $1.25 and $0.77 respectively.

Both of these vertical spreads were opened for $0.47, which is the maximum risk, while the maximum gain of $1.53 would come if the VXX is below $17 at expiration in mid-June. The open interest at each strike was below 80 contracts at the start of the day, so these are clearly new positions. (See our Education section)

The VXX is based on the two nearest-month VIX futures, which saw January contracts close at  15.55 and February futures at 16.75, while the spot volatility index finished the day at 14.68. Those increasing premiums are the reason that the VXX suffers from structural headwinds.

The VXX was down 11.82 percent yesterday, closing at $28.05. It was above $36 during Monday's session and has given up its gains of the previous two weeks just in the last two days.

More From optionMONSTER

View Comments (0)