VIX Options Hot as Fear Spikes

Stocks are spiraling today, as political uncertainty out of D.C. stokes fear among traders

May 17, 2017 at 1:02 PM
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The CBOE Volatility Index (VIX) is up 25.8% at 13.40 -- near its highest level since before the French election relief rally in late April -- as stock markets tumble on growing uncertainty surrounding President Donald Trump's legislative policies. However, considering May VIX options expire today, there was already an increased chance of a volatility spike, according to Schaeffer's Senior V.P. of Research Todd Salamone.

Specifically, in this week's Monday Morning Outlook, Salamone said that traders who have used "volatility short position will soon be unhedged. That means they're more apt to cover short volatility positions on negative news, or will be forced to replace volatility hedges, which puts a floor on volatility." In fact, since hitting a 10-year low of 9.56 on May 9, the VIX has jumped more than 37% -- with today's 20% spike on track to be the biggest since Sept. 9.

June VIX Options in Focus as May Contracts Expire

Against this backdrop, VIX options are crossing at two times what's typically seen at this point in the day, with 722,000 calls and 210,000 puts on the tape. Each of the index's 10 most active options reside in the standard June series -- which expires on Wednesday, June 21 -- with seven of those strikes calls. By far, the June 19 call has seen the most activity, with roughly 130,000 contracts traded.

VIX Options Buyers Target June 30 Calls as a Possible Fed Hedge

Heading into today's trading, peak open interest in the June series was found at the 30-strike call, with more than 304,000 contracts outstanding. Data from the Chicago Board Options Exchange (CBOE) confirms that the bulk of this activity has been of the buy-to-open kind, including a batch of 208,766 new positions that were purchased on May 9.

Given the deep out-of-the-money status of this VIX call option, it's likely that much of the action so far has been at the hands of traders looking to hedge their long stock positions against a volatility spike. Considering VIX options are based on the expected value at expiration, these speculators could be keeping a close eye on the mid-June Fed meeting, with Salamone recently noting that the "[Federal Open Market Committee] policy decision may be the most relevant headline impacting stocks."

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