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UPDATE 1-VIX options volume jumps as trader hedges against stock market sell-off
September 25, 2017 / 8:07 PM / 2 months ago

UPDATE 1-VIX options volume jumps as trader hedges against stock market sell-off

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By Saqib Iqbal Ahmed

NEW YORK, Sept 25 (Reuters) - Trading volume in CBOE Volatility Index options more than tripled on Monday from its average daily amount and was on pace for one of its busiest days ever, boosted by a record-sized trade hedging against a stock market sell-off.

The volatility index, better known as the VIX, is the most widely followed barometer of expected near-term volatility for the S&P 500 Index and VIX options allow traders to protect against future stock swings.

On Monday, VIX options volume hit 2.6 million contracts by 3 p.m. EDT (1900 GMT), compared with an average daily volume of 776,000 contracts.

More than 2 million contracts changed hands in a spread trade, the largest ever in VIX options, according to Trade Alert data.

A trader bought about 261,000 Oct. 12 puts and sold the same number of Oct. 15 calls and twice as many of the Oct. 25 calls.

At the same time, the trader sold 261,000 Dec. 12 puts and twice as many Dec. 25 calls, to buy 261,000 Dec. 15 calls. It was not immediately clear who the trader was.

The net effect of the trade was to position the trader for a lift in the VIX to the 15-20 level by December. The VIX was up 0.93 points at 10.52 on Monday.

“It does look like a roll,” said Michael Thompson, chief investment officer at Kaizen Advisory LLC, in Wheaton, Illinois, referring to the practice where an existing position is closed while another one further out in time is opened.

“I would guess that it is a hedge on a long equity book.”

A Dec. 8 deadline on the U.S. debt limit and government spending, and the U.S. Federal Reserve’s last meeting this year are among possible catalysts for increased stock market gyrations toward the end of the year.

Monday’s trades in the October contracts appear to close a position opened on July 21. If so, the trader paid $8.5 million to exit the position on October contracts and took in about the same amount to open the December contracts, according to options analytics firm Trade Alert.

The trade is a relatively cheap way for a large institutional investors to keep a hedge in place, said Joe Tigay, chief trading officer at Equity Armor Investments in Chicago.

“Whoever is putting it on is probably comfortable paying the insurance premium,” he said.

The new position offers a maximum payout of about $261 million, if the index settles at 25 at the Dec. 20 expiration, according to Trade Alert. (Reporting by Saqib Iqbal Ahmed; Editing by Bernadette Baum and Lisa Shumaker)

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