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More Volatility Ahead? Traders Are Betting On It

This article was originally published on ETFTrends.com.

Trade wars and yield curves are certainly a two-headed dragon that’s been plaguing investors as of late, breathing a heavy fire of volatility all over the capital markets. Traders are betting that this volatility isn’t a temporary scourge and will continue.

Traders have been quick to pile in on options contracts targeting the VIX volatility index.

“Where we saw a very interesting trade, and many of them, actually, was in the VIX index,” said Michael Khouw, president of Optimize Advisors. “Specifically, I was looking at the 30/35 call spreads. Somebody paid a little over 30 cents for 26,700 of those call spreads, which could potentially be worth $5 [per contract].”

The volatility index closed at 22.10 on Wednesday, but traders are betting that it could go even higher. How much higher?

Some traders are thinking past 30.

“I think the important thing to think about here is, it’s not just that someone is betting that the VIX could go above 30, because the underlying instrument for these options is the VIX future,” Khouw added.

“What happens is, when you see a lot of volatility the VIX curve actually ends up in backwardation. Spot VIX will end up even higher [than the futures],” Khouw said. “So, a bet that that future rises above 30 is a bet that something pretty wild is going on in the marketplace.”

Trade wars will certainly play a hand in the oscillations of that volatility index. Just as U.S. President Donald Trump announced new tariffs and then scaled back on certain items on the list of Chinese products, the markets were sent on a volatility rollercoaster ride.

Traders can take advantage of these markets movements in the S&P 500. For those especially looking for juicing up their trades, there are leveraged exchange-traded fund (ETF) options available.

Potential leveraged ETF plays in the  Direxion Daily S&P500 Bull 3X ETF (SPXL) and the Direxion Daily S&P 500 Bear 3X ETF (SPXS) could have traders placing these ETFs on their watch lists.

SPXL seeks daily investment results of 300% of the daily performance of the S&P 500 Index. The fund, under normal circumstances, invests at least 80% of its net assets in financial instruments, such as swap agreements, and securities of the index, exchange-traded funds (ETFs) that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index.

SPXS seeks daily investment results, of 300% of the inverse (or opposite) of the daily performance of the S&P 500 Index. The fund, under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the index equal to at least 80% of the fund’s net assets (plus borrowing for investment purposes).

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