Call Spreads Active in the CBOE SPX Volatility Index (VIX)

VIX Options Active I'd like to share a quick update on a large eight-part options trade we saw in the CBOE SPX Volatility Index (VIX) yesterday. A trader appears to have bought to close 23,000 October 24/26 call spreads (buying the 24 calls and selling the 26 calls) for a net debit of 60 cents.

Looking at historical data, it appears these same spreads were sold to open back in August for a credit of $1.20. Excluding commissions, the investor appears to have booked a profit of 60 cents for each call spread (the initial credit less today's premium paid).

Also in the October series, the trader seems as though he has bought to close 8,000 of the October 25/27 call spreads (buying the 25 and selling the 27). The net debit paid for this, on average, is 57.5 cents.

Simultaneous to closing the October spreads, this trader apparently sold to open 23,000 of the January 25/27.50 call spreads, selling the 25-strike call and going long the 27.50 call, collecting an average credit of $1.325 per spread. At the same time, the investor sold to open 23,000 of the February 25/27.50 call spread, which also came at an average credit of $1.325 apiece.

The most an investor can potentially gain with a short call spread is 100% of the credit collected. The potential loss, meanwhile, is capped at the difference in strike prices less the premium collected (or $1.175 for the January and February spreads). Profit is maximized if the VIX is trading below the short strike (25) when the options expire and losses peak if the underlying is above the long strike (27.50) at expiration.

Though both of these strikes appear to be out-of-the-money now with the VIX trading at $23.04, these options are priced off of the VIX futures, which currently indicate that the index will be trading over the 30% vol mark by January. These trades in January and February are wagers on where 30-day implied volatility will be on those future dates. Selling these call spreads likely indicates a view that this trader expects the actual 30-day implied vol to be lower than the levels the VIX futures are indicating today.

Of course a “bearish” call spread on the VIX could mean a “bullish” thesis on the broader market. Historically speaking, the market tends to rise (or at least stagnate) as the VIX falls, and fall when the VIX rises.

As I pointed out nearly a year ago, it is not intuitive trading the VIX due to the inherent risks involved. A few weeks later, I made this statement and I'll reiterate it here: “The VIX is a very non-standard contract that is especially complicated and not for investors who simply want to have exposure to an increase or decrease in the volatility level.” There are less complicated ways, through using options on traditional equities and ETFs, to trade volatility.

Photo Credit: Yahoo! Entretenimiento

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