Size Up OTM VXX Call Spread Says WARNING

Yesterday was not a big deal.

The key: We have seen much more volatility on rallies than we have on sell offs.

I mean 25 points is not nearly what we moved on Thursday of last week.

While that is a nice uptick from the movement the VIX was showing in the prior few weeks,  10 day realized volatility is still only up to 12.5%.  

Thus a VIX of 24.5 is about a 100% premium implied volatility to underlying movement.

That is HUGE.

In fact, we are going to talk about why today in a special “High Conviction” session at 12PM with our D.C. insider Frank Gregory.

However,  VIX traders are not taking the small sell off lightly.

The biggest trade between VIX and VXX on monday was in VXX.

A trader bought 13,000 of the VXX Jan 21 calls for .17 cents  and sold 13000 of the Jan 29 calls at .03 cents.

Net he or she paid .14 cents for 13,000 VXX Jan 21-29 call spreads.

A BIG NOTE HERE: These expire this week.

For this to pay out,  we would need a 25% move higher in VXX (break even is 21.15).

The spread reaches its peak if VXX rallies…

70%!!!

Considering that the spread expires this week, that would be an incredible move and mean there was some sort of systemic shock coming.

Could that happen out of Washington….

Well join me at 12PM to find out!https://us02web.zoom.us/j/82284736774

Markets are up about 1.15% this year…including the giant DUMP the market took on Monday the 4th.

The warning sign though,  and maybe why we saw the hedge,  the VIX is up on the year too.

I like the VXX call spread if the trader was buying SPX at the same time (I actually did something similar on Monday).

But other than an equity with hedge,  I think there are much better ways to play a volatility pop.

The VIX light is RED.

Your Only Option,

Mark Sebastian


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