These VIX Trades Signal Higher Volatility Is On The Way

| May 11, 2015 | 0 Comments

These VIX Trades Signal Higher Volatility Is On The Way

As you probably know if you read my articles on a regular basis, overall market volatility is most commonly tracked by watching the VIX.  The VIX (S&P 500 Volatility Index) is a measure of implied volatility levels on S&P 500 options.

VIX is popular because it measures the volatility of the most widely followed stock benchmark in the world, the S&P 500. Even if you’re not trading large cap stocks, the VIX is still a meaningful gauge of overall market volatility.

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

Trading volatility – or volatility products – has become extremely widespread.  It’s true for options traders of course.  But, even those traders who never touch options may still trade (or at least follow) volatility levels.

One of the great things about the VIX for options traders is there always seems to be action in the futures and options.  Don’t forget, you can’t trade the VIX directly… just its derivatives.  There are also multiple volatility related ETFs available, but none track the VIX precisely.

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

VIX options in particular are always worth keeping an eye on.  That’s where the smart money likes to execute important trading strategies and portfolio hedges.

Here are a couple big trades from this week…

With the VIX climbing above 15, a significant amount of call buying started to occur.  Towards the end of the week, two major VIX trades hit the wire.

First off, 30,000 May 20 calls were purchased for $0.60.  Later on, 30,000 May 18 calls were bought for $0.70.  Between the two trades, nearly $4 million was spent on premiums.

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

Here’s the chart:

large trade in VIX options, a chart of VIX

The VIX finally broke above the 50-day moving average after trending lower for several months.  This upward spike in volatility could be a sign that VIX is going to remain elevated for the next few weeks.

Both trades expire in less than two weeks, so the bet is clearly on a short-term surge in volatility.  Keep in mind, the May 20 calls break even at $20.60, while the May 18 calls breakeven at $18.70.

So, given the recent history, how likely is it either VIX trade will be profitable?

While both trades are expensive in volatility terms (it’s a lot to spend for OTM calls with just two weeks to go), neither trade is expensive in absolute dollar terms.  Given how fast VIX can move when volatility hits, both trades could potentially be big winners.

However, it’s also very possible both trades are being used as hedges against long equity portfolios.  If you think about, the trades could pay off in a high risk environment where stocks are selling off… exactly what you’re looking for in a hedge.

Yours in Profit,

Gordon Lewis
Options Trading Research

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.

Tags: , , ,

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.

Leave a Reply

Your email address will not be published. Required fields are marked *