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Complex put trade in volatility fund

Chris McKhann (chris.mckhann@optionmonster.com)

Huge volume in the iPath S&P 500 VIX-Short Term Futures Note is dominated by a complex put spread.

More than 487,000 VXX options have traded, twice the daily average over the last month. Dominating this is a four-way put trade.

optionMONSTER systems show that a trader bought 101,887 November 13 puts for $0.21 and 66,173 November 14 puts for $0.48. At the same time he or she sold 84,906 November 16 puts for $1.34 and 67,925 November 15 puts for $0.85. The volume at all four strikes was more than open interest, so this is new positioning.

The trader takes in a credit on the trade, which will be kept as profit if the CBOE Volatility Index remains above 16. The big gains would come if the VIX tumbles or at least if the November VIX futures, on which the options are priced, fall. So it is positioned for the binary situation that we face with the budget stalemate in Washington. (See our Education section)

The VXX is up fractionally this morning to $17.07. The exchange-traded note was at an all-time low of $13.42 three weeks ago and up at $21 in mid-June.

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