VIX Options Trader Braces for a December Volatility Spike

The CBOE Volatility Index hasn't printed above 20 since Nov. 9

Oct 4, 2017 at 2:56 PM
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Even with the U.S. stock market carving out record highs in today's trading, the CBOE Volatility Index (VIX) is up 1.8% at 9.68, on track for its second straight day of gains. While this upside should be taken with a grain of salt considering the market's "fear gauge" is lingering in single-digit territory -- and near historically low levels -- call volume on the volatility is running at a slightly accelerated clip today.

At last check, more than 457,000 calls had traded on VIX -- about 1.1 times what's typically seen at this point in the session -- compared to around 77,000 puts. Most of the action has centered at the December 16 call, where Trade-Alert highlights a 79,000-contract block that was possibly bought to open for an initial cash outlay of about $10.42 million (number of contracts * $1.32 net debit * 100 shares per contract).

While this options trade could represent a speculator who is growing more bullish in their volatility bets, VIX hasn't printed north of 20 since Nov. 9 -- the day after the U.S. presidential election. As such, it's likely this big options bet is a result of a traders hedging against an end-of-year volatility spike.

Supporting this theory is the latest Commitments of Traders (CoT) report, which showed a massive net short position on VIX futures. In fact, large speculators increased their net short position on VIX futures for a fifth straight week -- to the largest short position ever, going by the number of contracts.

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