Options Traders Take Aim at Surging VXX

The iPath S&P 500 Short-Term Futures ETN (VXX) is soaring as stocks sell off

by Karee Venema

Published on Sep 9, 2016 at 1:49 PM

Stocks are bathed in red ink today, with the Dow plunging the most since the June 27 post-"Brexit" bloodbath and the broader S&P 500 Index (SPX) on track to snap its noteworthy stretch of low-volume sessions. As stocks sell off, volatility is surging, with the CBOE Volatility Index (VIX) set to settle north of the critical 14.07 mark. Echoing the sharp move higher in the market's "fear gauge" is the price action in the iPath S&P 500 Short-Term Futures ETN (VXX), last seen up 10.2% at 36.92. What's more, VXX options volume is soaring, trading at three times what's typically seen at this point in the day.

By the numbers, around 171,000 VXX call options are on the tape, compared to roughly 122,000 put options. The majority of options traders are of the eleventh-hour variety, with the weekly 9/9 series accounting for nine of VXX's 10 most active contracts.

Seeing the most attention is the weekly 9/9 37-strike call, where nearly 10,400 contracts have traded. It looks like one speculator may have combined these calls with the weekly 9/9 36.50-strike calls to initiate a long call spread. If this is the case, the goal is for VXX to be sitting at 37.00 at tonight's close -- when the weekly series expires -- allowing the trader to pocket the maximum potential profit of $0.33 per pair of contracts (difference between the two strikes minus $0.17 net debit).

Elsewhere, the weekly 9/9 34-strike put has garnered notable attention. It appears as if new positions are being purchased here, as options traders brace for an end-of-session retreat for the volatility gauge. Regardless of where the iPath S&P 500 Short-Term Futures ETN (VXX) settles tonight, though, the most the put buyers stand to lose is the initial premium paid.

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