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Higher volatility expected to persist

Chris McKhann (chris.mckhann@optionmonster.com)

A large trader is looking for higher volatility to continue in the VXX exchange-traded note.

The iPath S&P 500 VIX Short-Term Futures Note saw 20,000 February 63 calls bought for $0.51 today. The strike's previous open interest was just 1,261 contracts, showing that this is a new position.
Traders buy VXX calls as a bet on higher volatility and/or as protection on long-equity positions. It is an especially tricky vehicle because it comprises two nearest-month VIX futures, which are usually higher than the spot CBOE Volatility Index. (See our Education section)

The note also has a daily roll, so it faces some structural headwinds. But with the spot VIX above those futures, it becomes more interesting as a good hedge. The volatility index usually trades inversely from the S&P 500.

The VXX is down 3.15 percent to $43.96 this morning, up from an all-time low of $39.85 last week. The VIX is at 16.33, the February futures at 16.50, and the March futures at 16.70.

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