This VIX Trade Sends A Message

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

The VIX ended the day down, and while I do not think those 15-strike puts I own will end up in the money …

There is a chance!

That being said, the biggest option trade of the day on Tuesday was a really smart trade in VIX.

Let me tell you what they did …

So, while the VIX ended the day slightly down …

VIX futures were mostly flat.

So what is going on?

Well, we do have VIX options expiration on Wednesday (today!) which could hold things up …

But given what has happened the last few days, I am sure the trading crowd is back to wondering if the wall (of worry) we are climbing is coming to an end.

My gut says no …

And the confirmation comes from a surprising place: a giant VIX trade.

Check out this trade:

A customer bought 57,000 of the VIX 17/50 strangles in February, paying $1.70…

Why would she or he do that?

Let’s talk about the P&L.

For this trade to make money, one of two things need to happen…

The VIX needs to settle below 15.30 …

OR …

VIX needs to pop.

If the trader really thought VIX was going to blow higher he or she would have bought the 20, 25, or 30 calls.

Instead they bought the 50s.

At the same time, they bought a put that is already in the money relative to the cash index.

This trader is really looking for a drop.

They think they can sell those 17-strike puts for a win, and then sit on the 50 calls.

I know it seems counter-intuitive …

But I would bank this trade, as I am looking for VIX to go to 14 between now and December.

I continue to look at the December puts (notice I didn’t give you the strike … if you want that, you need to be a Volatility Edge member) as a value.

Your Only Option,

Mark Sebastian

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