Light Volume, But Big Money In The VIX

The Option Pit VIX Light Is Red, And Volatility Is Likely To Drop.


Hey Traders,


Volume in the VIX option pits continues to be weak.


On Wednesday, VIX only saw 267,000 contracts cross the tape!


But what was interesting was …


While call volume was light, put volume was not.


What does this mean, and how am I going to play it?


The VIX has now had four days in a row where volume was under 300,000 contracts …


To put that into perspective, it has not done this all year.


What was interesting on Wednesday — aside from the ALARMINGLY low volume (especially if you are CBOE) — is what actually DID trade:



Puts outpaced calls by a decent margin.


Many of the trades that did go up were mostly somewhat longer-term fades on the VIX.


The biggest one was the January 2022 24-strike puts:



A trader bought about 22,000 of these puts in one trade, and about 30,000 on the day (29,187 to be exact) …


Why?


Look at the VIX curve:



The spread between September and spot (VIX cash) is big …


The spread between January futures and VIX cash is almost 7 points!


This trader paid about $5 to be long puts that were essentially at-the-money (ATM) relative to the January future, and WAY in-the-money (ITM) relative to the current VIX cash price.


What does this mean?


It means the trader not only thinks the whole curve is overpriced, but especially the back months.


And let me be clear: the back months are indeed SILLY over priced.


I like being short any part of this curve in the current market … but the January play is interesting.


Here is the thing though …


There was probably a better way to play this.


The 20-strike puts only cost $2.35.


I could buy those and sell the 15-strike puts against it, bringing my cost to about $2.00 total.


That spread is $1.21 ITM relative to cash, and has a payout of 2-to-3 (“pay 2 to make 3”).


From a risk reward perspective I think I like that trade better than the large one that went up yesterday …


Unless VIX REALLY dives …


Which is entirely possible.


For now, I would stick to a closer expiration term, and trade in VIX September,  or even ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY).


In fact, I am going to put out a UVXY trade in my Volatility Edge program very soon. If you want to receive it, you need to call (888) 872-3301.


Your Only Option,


Mark Sebastian

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