Tag Archives: Option Trade Idea

Following a $6.7 Million VIX Call Spread

On October 18th Bloomberg published an article (here) about a trader or institution that bought 160,000 February 24 calls and sold February 29 calls (in equal measure).  The open interest today is at 170,000 and the cost for the trader on October 18th was 42 cents per contract or $6.7 Million. I’m following this trade for fun.

It was very likely a hedge against the SPY (or maybe some SPX futures?). Almost 30 days later the pair would trade at about the same price but what’s interesting is to imagine what this trader/institution had on the other side.

Look at the 6 month VIX and SPX chart below.

VIX-SPX-Call Spread

The SPX is up about 50 points since October 18th and the VIX has barely budged from 13. What would the hedge be? Long SPX or short SPX? It’s a call spread so presumably long SPX (remember VIX has a pseudo inverse relationship with the SPX). The hedge will make money as volatility increases and a quick look at the chart above shows strong resistance at 13.

So how many shares of the SPY (or SPX futures) would you own, if you put in place a $6.7 Million hedge? That’s a good question…  But whatever their long position even 30 days later, it looks like a good trade.


SPY Warning Signs

SPY Troubles Ahead

The following are a few of the futures contracts I watch:

SPY Warning Signs

As I’m writing this the SPY is falling and Gold/Silver/Oil futures are rising. I’m reading this as a warning sign for the markets. I spoke about the VIX recently, here.

One explanation for this divergence is inflation. Central banks are printing, cash is being hoarded, the dollar is rising and corporate profits from europe are therefore vanishing. Add Greece debt to the mix and the strong possibility that they default, you add the inflation worry to the list and talking points for politicians, media, and market watchers.

Now take gas prices which are starting to come up as an election issue, even a war issue. Frankly high energy costs are a good excuse for the market to pull back, don’t forget that the media will be playing this up, mixed with war mongering, and as an election issue that’s low-hanging fruit and an easy way to scare off the recent retail investors market participation.

As a trade idea a SLV 40/50/60 butterfly at Jan expiration is one I’ve written about here and I still think this is a very prudent trade. Keep a close eye on USO as well.

Good trading.