If Only We Could Discuss VIX Bikini’s As Much as This Trade

Adam Warner in the Daily Options Report writes about the media coverage for the large out of the money VIX spread trade put on early this week. What is interesting is how much scrutiny the VIX is getting, even if wrong much of the time.

Not sure I’ve ever seen a single trade get this much press. But Don Fishback finds this reference to The Most Important Options Transaction Ever.

Can’t take it anymore. I’ve seen this too many times to not comment. Yesterday, a reporter for the Washington Post’s “The Ticker” wrote:

“At least one trader today placed a nearly $1 million bet that the VIX will rise above 45 by July, buying several thousand option calls.”

No, No, NO!

Just because somebody bought a million dollars worth of options does NOT mean that that person thinks volatility is going to 45. People buy options for 2 reasons: speculation and hedging. There is simply no way to know from the information presented in the article that this VIX call buyer was a hedger or a speculator. If the person was a hedger, then by definition they think the most likely event is that volatility is not going to go to 45, but they want to be protected in case it does. They bought volatility insurance!

It refers of course to the 20,000 lot of VIX 45-55 call spreads that went up last week.

Basically, following options order flow for directional clues is more art than science. When I was on the floor way back when, you kind of sort of kind of could get a feel for which players you wanted to follow and which ones you wanted to fade. But even that’s far from a path to riches.

And like Don says, who ever knows exactly what the player is doing overall. Even if you did, it’s still not a lock you want to follow them directionally or not. And let’s put this particular trade in perspective. Again, it was a low delta, way OTM call spread in the VIX. Remember it’s a VIX future, which this far out we figure will track about 40-50% of the VIX move. And even with the recent rally, the VIX still has a 31 full. Yes, you don’t need the VIX to actually go to 45 and above to win big on the trade. But as Don notes, 38 sure would work. We’re nowhere near that yet, and truthfully to get there you’d need to see the VIX in the 40’s as July would move to a discount.