Schaeffer's Trading Floor Blog

What the VIX and Wayne Gretzky Have in Common

Is the recent explosion in VIX volume a bullish sign?

by 2/5/2014 7:30 AM
Stocks quoted in this article:

Everywhere you look, interest in the CBOE Volatility Index (INDEXCBOE:VIX) is booming.

VIX futures?

Trading volume in CBOE Volatility index VIX futures hit an all-time high in January, suggesting investors were busy buying protection against a market decline.

The VIX futures trading volume totaled a record 4.40 million contacts in January, a 52-percent increase from a year ago and a 38-percent increase from December, the Chicago Board Options Exchange said on Monday.

VIX options (from Monday)?

The past few days have been all about records at CBOE. There was record SPX volume and record VIX option volume in January. Just when I thought we had all the records covered VIX option volume topped two million contracts changing hands today. It looks like the exact number is 2,382,752 contracts which beat the old record, set on October 8th last year by just over 600,000.

Even more impressively, 1,850,206 VIX calls alone traded Monday as per the above post from Russell Rhoads. If nary a VIX put had changed hands, the VIX calls alone would have set a VIX options volume record.

It reminds me of Wayne Gretzky. He had more career assists (1,963) than anyone else has total points (Mark Messier at 1,887). If Gretzky never had a goal, he's still be the NHL's all-time leading scorer.

But I digress.

The VIX volume trend is up-up-up. The five most active VIX options days have all taken place since October.

What's it all mean?

Well, the contrarian in me sees exploding VIX call volume on a day where VIX itself closed at its highest level in 13 months as somewhat bearish. Everyone's jumping into VIX at the top, right? Especially so when you dollar-weight it (remember, VIX itself was at recent highs).

Maybe it's bearish. But as we saw last week, not all VIX call trades involve the order initiator going long VIX. I'm referring specifically to that gigantic seller in VIX Feb 22 calls. Well, as per Bloomberg's Options Beat, turns out it was the second part of a spread.

Heard trader was long February 20 calls and sold the 22 calls to lock in a profit on the hedge after vix spike

He definitely profited. Unfortunately, he legged the VIX call sale part too early and missed Monday's spike.

The point though is, it's hard to ever know what anyone's doing with their open VIX calls. Which makes it hard to make blanket judgments as to what it implies for the market as a whole. I don't believe it's smart money loading up on VIX, but it's not clear it's all "square" money either. I'd lean towards the masses being wrong on their VIX love here. In fact I'm long a little of the VelocityShares Daily Inverse Short-Term ETN (NYSEARCA:XIV) here (not terribly well timed). But I'm staying small, as I'm guessing this ugly stretch lingers a bit longer.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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