Is 'Sharp' Money Chasing VIX Paper?

Analyzing the spike in CBOE Volatility Index (VIX) call open interest

by Adam Warner

Published on Jun 15, 2015 at 9:02 AM

Stop me if you think you've heard this one before, but… Everybody wants to buy some CBOE Volatility Index (VIX) calls! There's this, from Bloomberg:

"While the turmoil that rocked bond and currency markets in past weeks has been mostly absent from equities, it won't be forever, options traders speculate. 

They're building hedges against equity swings to levels not seen in eight months, according to contracts tied to the benchmark gauge for U.S. stock volatility. Judging by the most popular options, many of them are bracing for disturbances in the next six days.

… [A]bout 3.8 options protecting against a jump in the Chicago Board Options Exchange Volatility Index are held for each contract predicting a decline, Bloomberg data show. 

… [F]ive of the 10 most-owned VIX contracts are calls with strike prices as high as 23 expiring June 17, the last day of the U.S. central bank's June meeting." 

There was a also a huge call spread roll this week that bumped some of that open interest out to July, so basically there's a "bet" on both a very near- and not-quite-as-near-term  on a sizable VIX pop. And as Bloomberg notes, we've seen this before. Last time the open interest got this lopsided was September 2014, and it preceded a rather ugly October in the markets. 

As readers know, there's always a "bid" for VIX calls. We’re just at the higher end of that relative bid. On the one hand, it makes some sense. There's all these scary stories out there like Fed Hikes and Greek Defaults and yet VIX itself has barely budged. On the other hand … everyone always sees danger ahead, and always specs on cheap VIX calls. 

And then there's that pesky argument about whether it's "sharp" money chasing VIX paper, or "square" money -- i.e. John Q. Public hoping for a lottery ticket. And frankly, who knows? I always think contrarian first, especially when I don't see an ostensible reason for the behavior. But now? Eh.

As we've noted recently, volatility has picked up a bid in other asset classes, such as euro bonds and the actual euro. So why wouldn't you take a cheap shot at it sloshing over to VIX? The amount of money actually invested in VIX calls is incredibly low vs. any sort of asset class out there. Remember: All the spec is in cheap dollar calls. So yes, sentiment-wise I think it's a fade every time a crowd has the same idea. But we're just not talking enough of an overall "bet" for this to really have huge impact in that way, in my humble opinion. 

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


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