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Big trade bets on spike in volatility

Chris McKhann (chris.mckhann@optionmonster.com)

A huge trade is betting that volatility will spike higher in the next month.

optionMONSTER systems show that a trader bought 19,200 April 75 calls for the ask price of $0.33 in the iPath S&P 500 VIX Short-Term Futures Note. This is clearly a new position, as previous open interest in that strike was 9,418 contracts.

The call buying is a bet that the VXX could see a dramatic rise by that expiration in mid-April. It would have to soar 70 percent for this trade to be in the money.

The VXX comprises the two nearest-month VIX futures, which are typically higher than the spot volatility index (as they are now). As such, the VXX tends to erode similar to the way options do with time decay . But volatility can also pop quickly and sharply when equities sell off, making it a good hedge. (See our Education section)

The VXX is down 0.7 percent to $43.94 in midday trading.

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