The VIX had a huge range on Wednesday, moving from a high of 25.04 to a close of 21.34.
When the dust settled, it was a range of 3.73 points after closing just off the lows.
If you are a Cboe Global Markets (Ticker: CBOE) shareholder, I have good news for you — there was decent volume in the VIX contract.
If you are bullish the VIX, I have bad news …
Almost all the large block trades were bearish the VIX between now and April.
The biggest trade I saw was an April 23-21 put 1-by-2.
A 1-by-2 trade involves buying one put closer to the money and selling two puts further out of the money.
This is the type of trade my Pro’s will execute all the time (although sometimes whey will do the less margin-intensive version of this trade called a broken wing butterfly).
The trader of a 1-by-2 is expecting the underlying to move in the direction of the play … but not TOO hard.
In this case the trade …
– Bought 30,000 of the April 23 puts at 1.52.
– Sold 60,000 of the April 21 puts at .72.
The net of the trade is a debit of .08. Check it out:
To help you better understand why this trade is so great, let’s start by remembering that the underlying for April options is the April future … which closed the day at 26.85.
So, while the 23 puts are IN THE MONEY relative to the cash, they are almost $4 OUT OF THE MONEY when compared to the future …
If VIX just spins its wheels for the next month, this trader is going to make a LOT of money.
Because in about a month, if the VIX is at 21.34, the April contract will be trading about where the March contract currently trades.
The March contract closed 23.85, three points below April.
Remember that the trader paid .08 for the 1-by-2 … and VIX March 23-21 put 1-by-2 is trading at .25.
While that might not seem like a lot of money, a 212% win on 30,000 contracts that cost you .08 is $510,000.
Not a bad return on risk …
Plus, if things go right for a trade like that, this spread will only expand in the coming days.
The same 1-by-2 in the options that expire NEXT week is trading .90.
That is over a 1100% winner for a patient trader.
The $240,000 cost of the trade is now $2.7 million.
We execute VERY similar trades in our Option Pit Pro trading room.
The only difference is, we will buy a cheap out-of-the-money put to reduce the margin and risk.
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If I did it as a spread, I can pay less than .05 for the 16 puts.
Take a look at the risk profile:
I have almost no upside risk if the VIX blows higher.
My only real risk is if the VIX crashes …
This is a risk in an equity option, though not so much in a VIX future that tends to meander lower. (That’s due to VIX futures being European in style, meaning they can only be exercised at expiration, not before).
Basically, unless I take this trade into the final week of trading when the VIX futures start to REALLY react to VIX moves — or the VIX goes to 11 — I would have a very difficult time losing on this trade.
The Option Pit VIX Light Is Red, and volatility is likely to fall.
Your Only Option,