VIX Call Options Fly Ahead of Trump Inauguration, Fed

A number of scheduled calendar events have traders scooping up VIX call options, including Donald Trump's upcoming inauguration

Jan 17, 2017 at 1:49 PM
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CBOE Volatility Index (VIX) call options have been flying off the shelves, leading to speculation that investors are bracing for a massive stock sell-off, as these vehicles are commonly used to hedge long equity positions. According to Trade-Alert, Friday marked the fourth straight day of noteworthy action in out-of-the-money (OOTM) VIX calls, with traders homing in on the deep OOTM February 21 strike -- which expires on Wednesday, Feb. 15.

The expiration date is notable, as it follows a pair of highly anticipated events, either of which could spark a surge in volatility. For one, President-elect Donald Trump's inauguration is scheduled for this Friday; for another, the Fed's two-day policy meeting kicks off on Tuesday, Jan. 31. Although a rate hike is considered unlikely, Wall Street will be scouring the central bank's post-meeting announcement for hints of a potential interest rate hike in March, which could trigger a spike in the VIX.

Other factors are likely fueling the rush for calls, too, according to Schaeffer's Senior V.P. of Research Todd Salamone. "With February VIX futures recently hitting their lowest level since mid-December, volatility speculators and those using VIX options as portfolio insurance may see this as an opportune time to bet for or hedge against a pop in volatility," Salamone explains. "Earnings reporting season is about to get into high gear, the inauguration is scheduled for the end of this week, 'Brexit' headlines are returning, and another Federal Open Market Committee (FOMC) meeting between January VIX expiration and February VIX expiration is on the calendar, which may be enough to make VIX call options attractive."

Speaking more broadly about the bias toward calls on the market's "fear gauge," the VIX sports a top-heavy 20-day call/put volume ratio of 4.19 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Moreover, last Thursday, this reading clocked in even higher, at 4.78, its loftiest level since early November, per the chart below (courtesy of Schaeffer's Quantitative Analyst Chris Prybal):

vix call put ratio jan 17

It's more of the same today. With call open interest already docked in the 93rd annual percentile -- versus puts, which are in the middling 47th percentile -- calls are changing hands at twice the usual intraday rate. The deep OOTM February 17 call occupies the top position, while the third most active strike is the February 22 call. At last check, February VIX futures were 0.4 point lower at 14.20.

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