Dow Jones hits 23,000 as melt up continues >>> READ MORE

The Volatility Trade’s Not Dead Yet

Just because VIX values are low doesn't mean you should ignore the volatility trade


With the CBOE Volatility Index and other volatility measures sagging to relative lows, one might think that the volatility trade is dead.  Not the case, according to our options volume tracking filters which have identified some interesting options activity on the fear gauge, as the last few days have seen an unusual increase in call volume on the VIX proxy.

Tracking the average options volume on the VIX over the last five days, call volume has outpaced put volume by a measure of 3.5 to 1.  The excessive call volume puts the fear gauge’s call/put ratio at some of its highest levels in the last two years.  Historically, it has been our experience that options activity on the VIX represents “smart money” trades, especially when seen as excessive volume.  Given this perspective, the large volumes of call volume on the VIX would suggest that the “smart money” may be prepping to profit from a short-term increase in volatility.

The increase in volatility bets signals a potential opportunity for the traders out there as there are a few ways to position your portfolio to profit like the pros from a short-term pop in the VIX.

Click to Enlarge
First, the straight volatility play using the iPath S&P 500 VIX Short-Term ETN (VXX).  This exchange traded note acts as a proxy to the VIX, as the holdings of the ETN move with a high degree of correlation to the fear gauge.  Trading at $18.20, the VXX shares are encroaching oversold territory at the same time that they sit on chart support at $18.  A short-term target of $20 is reasonable target when the market does finally decide to take a corrective turn lower.

More aggressive traders might like an options play of their own.  For the traders educated on options trading, the June 19 calls (VXX130607C00019000), trading at $0.65, provide an easy way to leverage a quick rally in volatility.

Summarizing the potential results, a move to our initial target of 22 on the VXX would result in a 9.8% return on the VXX shares.  The leveraged nature of the June 19 call means that the options strategy would return a higher profit.  Based on intrinsic value alone, the options strategy would result in a 50% return with a VXX price of $20.  This return would be dramatically higher (more than 100%) if the spike in volatility happens over the course of the next week as we suspect might happen.


You’ve seen Trader X on CNBC, Bloomberg TV and Fox News Channel.

You’ve read Trader X’s market insights in Barron’s, The Los Angeles Times, The Washington Post, The Wall Street Journal, USA Today and on the AP Newswire.

Trader X frequents national investment conferences and has developed several market analysis tools that harness the powerful combination of behavioral analysis and technical analysis. He has decades of experience as a registered broker.

But we can’t reveal the source of this trade. Trader X’s privileged insight means he needs to be careful. He must act anonymously. While his identity can’t be known, Trader X will pull back the curtain to the trades he’s discovered.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC