The volatility index has been tame in 2017, but traders have rarely shown a greater interest in VIX options
The CBOE Volatility Index (VIX) has been historically tame as the post-election "Trump rally" has played out, but interest in VIX options has remained strong. According to Trade-Alert, total options open interest on VIX stands at 9.68 million contracts -- an accumulation that registers in the 92nd percentile of its annual range. The current VIX open interest configuration is heavily tilted toward calls, of which there are roughly 6.82 million.
VIX Options Sellers Eye April 20 Calls, April 13 Puts
The top open interest strike for VIX is the April 20 call, where traders have stacked up 368,892 contracts. Data from the Chicago Board Options Exchange (CBOE) indicates that a slim majority of these VIX April 20 calls were sold to open -- although the most recent major influx at this strike occurred on Monday, April 3, when 20,651 VIX April 20 calls were bought to open.
On the flip side, the second most popular VIX strike is the April 13 put, with 359,444 contracts located here. CBOE notes a stronger skew toward sell-to-open activity, including a total of over 30,000 VIX puts that were written at the April 13 strike on March 22 alone.
What You Need to Know About VIX Options Trading
In analyzing VIX options activity, it's important to remember two factors: (1) VIX options are based on the expected value at expiration (in this case, April 19), and so are more closely correlated with VIX futures than with spot VIX; and (2) given the frequency with which VIX options are used as hedges, the sentiment takeaways on big open interest accumulations are not always clear-cut.
For example, Commitments of Traders (CoT) data shows large speculators with a sizable net short position on VIX futures, but commercial hedgers are net long -- so there are two major contingents of investors with opposing VIX futures bets, both of which could be using options on the volatility index to hedge. Additionally, some investors will buy VIX calls to "hedge" a long equity portfolio against volatility spikes.
As for the predominance of sell-to-open activity at the April 20 call and April 13 put: VIX futures contracts for April (VIXAPR) and May (VIXMAY) haven't printed as high as 20 since right before the November presidential election. And while April VIX futures have dipped below the 13 level on a regular basis since late March, the May contract has yet to move lower than 13.10 so far this year.
Key VIX Levels In Play
Meanwhile, as Schaeffer's Senior V.P. of Research Todd Salamone has discussed in Monday Morning Outlook, there are some key VIX levels in play on the charts right now. Overhead, the 14-15 area has been a ceiling since mid-November, with the year-end 2016 close standing at 14.04. (The VIX 200-day is also in this vicinity, per the chart below -- though the index does not have a history of respecting these types of benchmark daily moving averages in the same way that tradable assets often do.)
On the downside, 11.25 represents half the pre-election closing high, while 11.23 marks a 20% year-to-date decline. Since December, VIX dips to this area have preceded periods of short-term weakness for stocks. And back on Feb. 1, VIX tumbled as far south as 9.97 intraday, marking its first single-digit handle in about a decade.
