Tag Archives: Option Spreads

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.


Pre-Market Indicators

This will be a crazy day, it already has been.

The first sign of wierdness are the CBOE Put/Call Ratios, here. The CBOE Index Put/Call Ratio has only been this low one other time since Jan 2011 and that happened on June 11th, 2012.

  • The EURUSD is now under 1.22 (-0.41%)
  • Asian markets are down with NKD 2.03% and HSI down -1.88%
  • Europe is down with the CAC40 -0.70% and FTSE down -.70% and the DAX -0.80%
  • Gold is off -0.80%
  • Oil is off -1.41%
  • S&P is off -0.75%
The only thing likely to change this trend will be very good initial and continuing claims numbers which come out at 8:30am EST. I can’t wait to see the VIX on open.
Good Trading


As is all too usual, the markets have surprised me. Many of my assumptions this morning were wrong, atleast thus far, even my reflection on Morgan Stanley yesterday! To be honest, I’m still sceptical and it will be worth revisiting these assumptions at Friday close. I was sceptical of this euphoria, and should have reacted more quickly with the strength into yesterday’s close. That was one key clue, that I should have better covered my risk.

Plan: Start adding some June 129 or 130 puts, that will depend if we continue to show strength EOD.

I’ve been watching a Silver 40/50/60 butterfly since last Jan., and think it’s worth revisiting.

This looks overextended, but maybe I shouldn’t be making assumptions today.

As ugly as this day was for me, I prefer these moves.

Good Trading

Red Telephone

Who’s up for Twister this weekend?

It’s been a long time since we’ve seen a 2% drop across the board. Europe is getting ready to close and my only rising indicator is Gold which seems to finally to be working again as you might expect – safe haven. I missed that trade, though considered it yesterday. Who’d have guessed the numbers today would be as bad as they were?

Red Telephone

I’m adjusting a $SPY 130/125/120/115 condor and adding a bit to my short 120’s; if after the European close we break 130 I’ll add to my 130 leg, if not I’ll hold them through the weekend. The trend is solidly moving towards my target range of 120-125 for the $SPY. I’m going to stick with the spread and adjust with the swings.

My expectations are that we’ll see some positive headlines out of Europe this weekend. The bureaucrats are running around trying to find something good to spin at this very moment, you can be sure of it. Germany, red. France, blue. Ireland, green. Whether they’ll succeed in not falling all over each other is another question, but Hollande has by now probably plugged in his telephone.

It’s been ringing all week.

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.