Why puts are spiking in volatility note

optionMONSTER

The VXX exchange-traded note is seeing huge put action as it hits new all-time lows this morning.

The iPath S&P 500 Short-Term Futures Note has quickly become a popular instrument for playing volatility. Today we already see 108,000 options change hands, though that is below its full-session average over the last month.

optionMONSTER systems show that a trader bought 7,000 November 12 puts for $0.51 against previous open interest of 16,736. At the same time he or she sold 21,000 November 11 puts for the bid price of $0.19 in volume far above open interest of just 923, so that is a new position. The trading in both strikes continued shortly after, with a total of 30,000 puts changing hands at the 11 strike and 10,000 at the 12 strike.

This could be the roll of a short-put position while increasing its size. But given that they are still both out of the money, it seems more likely that this is a ratio spread. In the latter case, the trader sees the VXX holding above $11 through expiration in mid-November, though the maximum gain in the trade would come with the note right around that level.

The VXX is down fractionally to $13.61 after hitting an all-time low of $13.42 earlier in the session.

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