The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move wildly.
The SPX closed off the lows on Monday and managed to stay above 4100 … but not before threatening to break lower briefly.
Yet again – and for the third day in a row – VIX outperformed movement in the underlying index. If this trend continues. we could see a big upcoming move in the SPX.
With Fed Chair Jerome Powell speaking today, we might be able to explain some of the action from Monday away …
Except it's not just Monday’s action. VIX, and more notably VIX futures, have been going up for a few days at this point.
In addition, we have seen a massive uptick in volume of the VIX index options. In fact, we have seen two massive trades in the past three days …
On Thursday, a trader bought nearly 300,000 March calls:
On Monday, a different trader put up a massive long call spread in June…
There are a couple of things that are important about these trades.
- They are bullish, looking for VIX to move higher.
- They are NOT especially near-dated.
They would both benefit from a near dated move, but will perform much better if the move happens after February expiration
I would note the VIX March options expire following the FOMC meeting on the 15th and 16th. The June options include several of these meetings.
Could a liquidity sucking bomb be about to drop … or is this just a hedge against a long?
The answer is, it doesn’t really matter.
The fact that traders are stepping in here means we could have seen a near-term bottom for VIX, even if the market isn't going to fall flat.
The Trade
You like the S&P 500 higher … buy SPY buy March options. You like it lower, buy puts on spy and buy February puts (which did see some action on Monday).
Your Only Option,
Mark Sebastian