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…


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!

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

DISCLAIMER: FOR EDUCATIONAL AND INFORMATION PURPOSES ONLY; NOT INVESTMENT ADVICE. The materials presented from Option Pit LLC are for your informational and educational purposes only. Neither Option Pit LLC nor its employees offer investment, legal or tax advice of any kind, and the analysis displayed with various tools does not constitute investment, legal or tax advice and should not be interpreted as such. Using the data and analysis contained in the materials for reasons other than the informational and educational purposes intended is at the user’s own risk. 
DISCLAIMER: OPTION PIT LLC IS NOT AN INVESTMENT ADVISOR OR REGISTERED BROKER. Option Pit LLC is not responsible for any losses that may occur from transactions effected based upon information or analysis contained in the presented materials. Specific trading ideas or strategies discussed in the presentations or materials are entirely illustrative and do not constitute the solicitation of a transaction (or transactions) or a recommendation to execute a particular transaction or implement a particular trading strategy.
DISCLAIMER: TRADE AT YOUR OWN RISK; TRADING INVOLVES RISK OF LOSS; SEEK PROFESSIONAL ADVICE. To the extent that you make use of the concepts with the presentation material, you are solely responsible for the applicable trading or investment decision. Trading activity, including options transactions, can involve the risk of loss, so use caution when entering any option transaction. You trade at your own risk, and it is recommended you consult with a financial advisor for investment, legal or tax advice relating to options transactions.

Leave A Response

* Denotes Required Field