Stocks quoted in this article:
Time to go to the mattresses? This, from Art Cashin, transcribed (I assume somewhat accurately) by Business Insider:
A Very Big Bet In A Somewhat Unlikely Instrument – My friend, Jim Brown, the ever-alert consummate professional over at Option Investor pointed us to a rather unusual trade . Here's what he wrote in last night's edition of his valuable newsletter:
"In past years I have reported on trades that were so large it appeared someone had inside knowledge of a pending event. Sometimes those were massive put positions on the S&P. A new trade just appeared that suggests there will be a market event in the near future. Last week somebody put on a call spread on the VIX using the April 20 and 25 puts. They bought 150,000 contracts for a net of $75 per contract. That is an $11,250,000 bet that the VIX will move over 20 over the next 60 days. You would have to be VERY confident in your outlook to risk $11 million on a directional position with the VIX at five year lows and the markets trying to break out to new highs."
Jim then goes on to list some of the scheduled events and deadlines visible over the next 60 days (mostly in Washington). When you add in the broad variety of geo-political possibilities, it's a decent reason to stay extra alert.
By my sophisticated estimates, this is about the 700th big-money "market crash" play that's gone up in the CBOE Market Volatility Index (VIX) in the last few years. They've successfully timed maybe three of them, just by virtue of the fact that the market has accidents every now and then, and someone had to have owned some VIX upside into it.
What I'm saying is … don't get carried away every time you hear of someone playing for a VIX-plosion via cheap calls. It's just the standard play in here. But let's break this one down anyway.
I'm guessing, first of all, that it was actually a call spread that went up, judging by the open interest in the April 20 (241,839) and April 25 (182,790) calls. So someone paid $0.75 for that, which is in line with the current prices, for that outlay of $11,250,00. That sounds like big money for most of us, but for a fund insuring a portfolio, it might have the magnitude of a rounding error. And it's highly likely this is a big player making the play.
What's more, how do we know his motivation? Is he buying on spec because he's wired in and knows something? That's bearish, I suppose, if you assume he's generally right. Is he nervous and buying ahead of some pretty well-known events (like the March Sequester, to name one). That's bullish on the margins.
The buyer also doesn't necessarily need a market crash to benefit. If VIX goes up to the high teens, it sets him up to do things like sell VIX futures, sell index puts, buy index futures, buy more stocks, et. al. Maybe that's his whole goal also.
I'd really just emphasize not reading a whole lot into VIX option plays. They're relatively low-dollar bets and almost always the same nature as this one. We'll conveniently go back and lionize the plays that catch VIX pops right, and forget about the many failed plays that preceded it.
Disclaimer: The views represented on this blog are those of the individual author's only, and do not necessarily represent the views of Schaeffer's Investment Research.