Watch Out For September

| May 28, 2014 | 0 Comments

Recently, I wrote an article discussing an interesting trade in iShares MSCI Emerging Markets (EEM) options.  The trade was meaningful because it was a significant bet or hedge on the entire emerging markets asset class.

This week, there’s once again been an intriguing trade worth discussing.  This massive trade could have broader implications on the overall equities markets.

Here’s the deal…

Some trader spent a whopping $13 million on a VIX call spread.

The S&P 500 Volatility Index (VIX), typically referred to as the VIX, is widely used as an investor fear gauge.  The higher the index, the more volatility is present in the markets.  And, more volatility equals greater investor concern.

The VIX is also a very popular hedging instrument.  Some believe it’s even taken over for the SPX as the main institutional hedging vehicle.

That being said, let’s get back to the trade…

A trader purchased 150,000 September 19/28 call spreads in the VIX.  That means the person purchased 150,000 September 19 calls while selling 150,000 September 28 calls.  The total cost of the trade was $13 million.

The trade becomes profitable if the VIX closes above 19 (plus the premium costs) by September expiration.  The trade reaches its max gain if the VIX closes at 28 at that time.

By the way… max gain on this trade is $122 million. 

A trade like this is one of two things.  It’s either a massive bet that volatility will spike after the summer.  Or, it’s a hedge against a large, long-equity portfolio.  Either way, $13 million is a lot of money to drop on one trade.

Keep in mind, the VIX is trading at 52-week lows right now, around 11.50 at the time of this writing.  Just to get to the bottom strike, the volatility index would need to jump 65%.

Regardless of the reasoning behind the trade, it bears watching.  Whether it’s a speculative bet on an increase in volatility or an expensive hedge, it’s too big a trade to ignore.

It’s not unusual after a slow summer for action to pick up in September.  With elections coming up this fall and plenty of geopolitical risk, this could be one of those volatile post-summer seasons.

This coming summer may very likely be uneventful… but stay tuned for September.

Yours in Profit,

Gordon Lewis

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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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