The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to swing wildly

On Monday the VIX dropped .54 points …

Considering we were coming off a weekend, that is not an insignificant drop.

With the nice rally on Friday, I would have expected at least some volatility faders to step in and play the VIX lower.

Instead, we saw the opposite.

I have made a note of the giant open interest in longer-dated upside calls.

Most of this was created in the form of backspreads … with the trader selling an option at the 35, 40, or 42.5 strikes to buy five times as much at the 70, 75, or even the 90 strike.

On Monday we saw another massive upside call trade.

But this one was different ….

For starters it was somewhat shorter-dated … executed in November.

But the bigger deal is that it was not a backspread, but instead, it was straight calls tied to futures.

The trader bought in two prints 160,000 of the November 50 calls

He or she executed this delta neutral tied to futures.

This massive bull play in VIX is looking to move relatively soon MUCH higher in the index.

I would rather own a call spread than these straight VIX calls.

The November 35 calls cost about 1.60, I could then sell the 50 calls at .70 or so, owning the 15-point vertical for less than 1.00.

Then I could use October to buy puts playing some VIX convergence in the near term.

Questions? Drop a comment below or shoot me an email.

Your Only Option,

Mark Sebastian