GIANT Trade Pushes VIX Futures

The Option Pit VIX Light is RED, and I like short volatility plays.

Hey Traders,

The VIX was bid today.

VIX futures went slightly up even as the S&P 500 spun in place.


One HUGE trade in VIX.

A trader bought 80,000 April 20 puts, then sold 80,000 April 55 calls.

It looks like the broker “crossed” the whole trade, meaning he or she had a buyer and seller matched up at prices market makers wouldn’t like.

Why would a trade like this push up futures?

Because it’s a classic example of what’s known as a “collar” …

That’s when a trader buys a stock, buys a put and sells a call … and I’ll tell you a little secret about that in just a minute.

In this case, the trader bought the 20 put and sold a 55 call against what is likely a futures trade,  taking in a .71 credit.

Remember, futures are not the VIX. They are the market’s best guess at where the VIX will be at the time of the VIX futures expiration.

The April contract is trading at 28.15 (the third dot in the futures chart below).

This trader likely bought April futures and put on the collar at the same time.

While the options by themselves are bearish, when futures are added, the trade actually ends up looking like a call spread:

In the chart above, if the April future goes up, the trade makes A LOT of money.

So about that secret…

This collar is bullish the market. Because it is a hedge.

If the trader thought the S&P 500 was going to drop, they would have bought puts in S&P 500 Index (SPX) or simply sold the market …

I know it sounds strange, but pro traders hedge because they like the position they are hedging … otherwise they’re selling.

Your Only Option,

Mark Sebastian

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