Another Interesting, Giant VIX Trade Happened

| April 29, 2015 | 0 Comments

Another Interesting, Giant VIX Trade Happened

As an options trader, you should always have a general idea of what’s going on with volatility. You don’t necessarily have to master the concept. But, the more you know about the topic, the better off you tend to be.

As you know, overall market volatility is most commonly tracked by watching the VIX.

As a reminder, the VIX (S&P 500 Volatility Index) is a measure of implied volatility levels on S&P 500 options. In terms of getting a snapshot of what volatility is up to (and how concerned investors are), you can’t do much better than glancing at VIX levels.

VIX is popular because it measures the volatility of the most widely followed stock benchmark in the world, the S&P 500. It’s also been around longer than any other volatility index (although it originally measured the volatility of the S&P 100).

For a more detailed description of VIX, check out the CBOE’s main VIX page.

Keep in mind, the VIX isn’t a tradable instrument, so VIX options and futures are often the way to go for volatility traders. Both derivatives are used often by institutions for hedging or speculating on future volatility. There are also multiple volatility related ETFs available, but none track the VIX directly.

To read more about VIX futures and options, follow the link.

As I like to point out regularly, the biggest options trades tend to happen in VIX options. That’s where the smart money likes to execute important trading strategies and portfolio hedges.

Here’s an important example from this week…

During the week, a trader bought over 90,000 VIX May 12.50 puts in one massive block. The puts only costs $0.09, but the total cash outlay was still over $800,000 considering the size of the trade. That’s also the max loss on the position.

Okay, so what’s the deal with this VIX trade?

First off, let’s look at the chart:

large trade in VIX options, a chart of VIX

As you can see, the price of the VIX has been trending lower as volatility has come out of the market. The price has remained below the 50-day moving average since February despite testing the resistance a few different times.

The breakeven point for the trade is $12.41. With the VIX currently trading at $12.35, the puts are already in the money. However, we’re already at the lows of the year so far.

So, given the recent history, how much lower can the VIX go?

Keep in mind, with 90,000 long puts, the VIX doesn’t have to drop all that much for the trade to be a huge winner. Even if the trade closes out with the VIX at 12, profits would be over $3.5 million!

With very little volatility hitting the markets over the past few weeks, this very well could be the trader’s strategy. That is, the trader could be buying cheap puts and waiting for the VIX make new lows on the year.

However, another possibility is this trade is a (relatively) cheap hedge against a short-biased portfolio. If the stock market doesn’t sell off by May expiration, these VIX puts could cover some of the portfolio’s losses. It’s an interesting, mostly inexpensive way to hedge a short position.

Yours in Profit,

Gordon Lewis

Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

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