VXX Call Options Hit Fever Pitch

Implied volatility on the VXX has surged

by Josh Selway

Published on Aug 17, 2017 at 2:58 PM

The U.S. stock market is under pressure today, and that has the CBOE Volatility Index (VIX) -- viewed as Wall Street's primary "fear gauge" -- up 20.7% at $14.17. As such, a number of volatility ETNs are also in focus, including the iPath S&P 500 VIX Short-Term Futures ETN (VXX). In simple terms, this instrument tracks the first two months of VIX futures contracts, allowing traders a way to bet on volatility. Today, VXX is up 10.4% at $12.97, and options trading is accelerated. 

Jumping right in, speculators are showing a much stronger-than-usual preference for VXX calls today, with roughly 533,000 contracts traded. This is two times the expected intraday rate, and has volume pacing in the 98th annual percentile. Moreover, the volatility ETN's single-day put/call volume ratio of 0.44 is on track to settle just 9 percentage points from its 52-week low of 0.22, hit on July 26. 

The two most popular options today are the August 12.50 and 13 calls, and data suggests buy-to-open activity is taking place at each front-month strike. If this is the case, volatility traders are betting on VXX continuing to run higher through tomorrow's close, when the contracts expire.

Also noteworthy is a block of 8,000 weekly 9/1 13.50-strike calls, which were seemingly bought to open for 36 cents each. If this is the case, this trader spent $288,000 (number of contracts * premium paid * 100 shares per contract) on the volatility ETN breaking out above $13.50 by expiration at the close on Friday, Sept. 1.

Given the record high net short position in VIX futures, though, this could also be a result of a trader hedging against a bigger volatility spike. This could be continuing a trend, too, with VXX call open interest of 3.25 million contracts already at a 52-week high.

Regardless, anyone buying VXX options today will need a fat wallet. That is, the 30-day at-the-money implied volatility has jumped to 84.6% -- in the 95th annual percentile, meaning heightened volatility expectations are being priced into short-term premiums.

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