The Option Pit VIX Traffic Light Is Yellow: Volatility Is Likely To Move

Hey Traders,

One of the things we stress here at Option Pit is risk vs reward.

If I am going to take down risk, I better get a good reward for taking that risk.

Sometimes I see big paper doing things that astound me and leave me thinking … What are they thinking?

Here is a good example of that … and how I can trade it.

At the end of the day we saw a trader put up a MASSIVE call spread:

We are used to seeing traders put up way out-of-the-money calls to manage risk in their book.

But this one is different. 

Why?

Because the trader sold 81,350 contracts of the June 60-70 call spread at $0.26 … opening.

This means in order to collect $2,115,100 dollars, the trader put on $79,234,900 dollars of risk.

The trader is looking to collect about 2.67% yield on risk for a three-month hold time.

Now, this could have been done against some sort of over-the-counter trade that went up, then it might make sense.

But if it is not done that way, the question is: Is this worth the risk?

No, it is not.

On the other hand this does tell me one thing: a giant trader thinks the VIX is not going a lot higher any time soon.

At this point, I think it makes sense to fade April futures. I laid out a trade I really like in Volatility Edge on Monday.

With VVIX (the VIX of VIX) now near six-month lows, I would rather buy puts than sell this call spread.

Your Only Option,

Mark Sebastian