Normally Speaking

The Option Pit VIX Light Is Red, and Volatility Is Likely to Go Down.

 

Hey Traders,

 

On Thursday, the VIX closed below 17 for the first time since the pandemic began.

 

Interestingly, it was also one of the busiest days for the VIX options that I have seen in some time.

 

Take a look at the options trading yesterday:

 

 

VIX traded 1.226 million contracts.

 

Notably, calls were traded at a ratio of almost 2-to-1, while the trend of late has been more puts than calls.

 

Part of the reason is because of one GIANT trade that went up in July.

 

A customer bought to open 200,000 VIX 25-40 call spreads:

 

 

In the biggest print of 45,000, the customer paid $2.25 for the spread.

 

There were also big call buys on the 50 strike in June.

 

At the same time, check out the single biggest trade of the day:

 

 

A customer bought almost 47,000 of the VIX May 16 puts for .23 cents.

 

In fact, there were all sorts of large VIX prints in puts across April, May and June.

 

This breaks into two themes:

 

        • Near-term Softness in the VIX: Customers bet all day that the VIX was going to continue its recent decline by buying out-of-the-money puts at inexpensive prices (like the May puts above).
        • Long-dated Hedging: Customers put on trades to protect themselves if the VIX blows up again.

 

Back to Normal

 

Here is the crazy thing, those two themes actually align with one mega-theme:

 

        • Normalization

 

The VIX is normally in the 12-14 range, so owning puts makes sense.

 

And when the VIX is lower …


Customers like to buy calls to hedge against volatility.

 

That 200,000 lot is not a random bet on VIX going up in July. It is a hedge against a long position somewhere either in stocks or bonds.

 

The VIX is finally low enough that customers are willing to use VIX to hedge.

 

The implications are huge:

 

  • First, these trades imply that call buyers are back, which is great for the product as a whole. 

 

When calls are busy in VIX, the trading is historically MUCH better. They imply VIX is going lower, which is also huge considering how much cheap out-of-the-money long puts the Volatility Edge portfolio is holding.

 

        • It also points toward a normalizing stock market with returns that are not like playing a game of Whack-a-Mole.  
        •  
        • Finally, it suggests the VIX curve is in for a steepening of contango as traders hedge long term and fade short term.

 

Based on the above I think VIX option volume is going to go up …

 

But, Mark, I don’t trade the VIX that often,  you might say…

 

Here’s a tip: When VIX volumes are high, Chicago Global Markets (Ticker: CBOE) stock goes higher. VIX, of course, is CBOE’s volatility index, and I would be a buyer of CBOE if we continue to see volumes like this.

 

For those that DO want to trade VIX, stay tuned … Volatility Edge is heading for an incredible next quarter managing short volatility positions (while being hedged).

 

If you’re interested in learning more about that right now, give Ted, our Head of Customer Care, a call today at 1-888-872-3301 between 9 a.m.-5 p.m.

 

The Option Pit VIX Light Is Red, and Volatility Is Likely to Go Down.

 

Your Only Option,

 

Mark Sebastian

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