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Trader targets floor in volatility fund

Chris McKhann (chris.mckhann@optionmonster.com)

The VXX volatility exchange-traded note is just above its lows, but the big trade of the day is looking for a bottom.

The iPath S&P 500 VIX Short-Term Futures ETN has just turned positive, now up 0.4 percent to $11.76. It was on pace for its lowest close ever, though it was just below that price in intraday trading on Tuesday. Shares have trended lower from above $59 at the start of October and are down 50 percent in just the last two months.

The VXX comprises the two nearest-month VIX futures and includes a daily roll from the front month to the second month. The fact that those futures typically carry a premium over the spot VIX reading--and the premium increases with each successive contract--means that the VXX will essentially decay in value even if the VIX is unchanged.

optionMONSTER's systems detected a block of 10,000 January 2014 6 puts sold for $0.95. The previous open interest at that strike was just 425 contracts, so this is clearly a new position.

The trader apparently believes that the VXX will remain above $6 through that expiration in early 2014. This is an interesting bet that volatility will move higher and stay there in the long term.

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