The Option Pit VIX Light Is Red, Volatility Will Drop.
Hey Traders,
Tuesday — while busier than last week — was another slow day for the VIX options.
However, that does NOT mean there weren’t meaningful trades that went up.
On Tuesday, I saw two traders do a spread that I really like … a lot.
So much so that I might piggyback the trade …
Here is what the trade is, and how I would do it myself.
It was another slow one for VIX on Tuesday.
That said … the VIX did manage almost 400,000 contracts … WAY more than last week’s trading.
In the order flow below, I want to point out a trade I really liked:
A customer (or two customers at different times) did a relatively large trade in VIX options.
The trader executed a put 1-by-2 spread.
The trader (or traders) bought 8,500 and then 6,700 contracts of the October 19-strike puts.
He or she then sold twice as many of the 17-strike puts, creating a 1-by-2.
And the trader was able to do this and only pay $0.37.
This means that if VIX stays above 15.37, the trader is a winner.
The ‘sweet spot’ for this trade is at the 17-strike.
Here is what the trade looks like today:
The October future is currently priced around $20.90.
With the VIX around 16.48, the VIX future will not be near 17 until the final week of expiration.
If the VIX slowly drops between now and then, the 17s are going to delay a huge amount.
If the October VIX future is $18 the week before expiration, check out how profitable this trade will be on October 13th, the week before October expiration:
This trade is showing only 1-by-2 contracts.
With a cost of $37.00 per contract, the trade is up $42.00…
Over 100% in a month … that is HIGHLY profitable!
Now, you might not want all the margin the second 17-strike put creates for the trader.
Great! Believe it or not, the one trade belonging to someone else on that list of size trades has our answer!
We can buy a 14-strike put for $0.05, creating a slightly-broken-winged butterfly to cut the margin down to almost nothing:
On October 13th, we are still up almost 100%. It’s a nice trade, and I might just do this tomorrow in our Volatility Edge program. Call 888-872-3301 to find out more.
Your Only Option,
Mark Sebastian