What’s This Massive VIX Options Trade Telling Us?

Dynamic Wealth Report  |  March 28, 2014 The One Secret to Successful Investing I think we'll all agree a buy-and-hold approach simply doesn't work anymore. So, how can you work within today's crazy markets to restore your retirement and investment accounts to pre-crash levels? You need a system. Without a system, emotions drive your investment decisions.  You need a proven system with a track record of calling winner after winner. You either have a system or you lose money.  Which side are you on? Read more here… What's This Massive VIX Options Trade Telling Us? By Gordon Lewis, Options Trading Research If you've been reading my articles for any length of time, you know I often like to point out unusual options trades.  Typically, once a week I'll cover a couple trades which are either much bigger than normal or on stocks with historically low activity. However, sometimes I'll come across a really interesting trade worth highlighting, above and beyond the normal coverage. Recently, one of those special options trades occurred on the S&P 500 Volatility Index, more commonly known as the VIX. Remember, VIX is the benchmark for market volatility and is often called the investor fear gauge.  Basically, volatility is a measure of how worried investors are about a big selloff in equities.  So, the higher the VIX, the more investors are concerned about market conditions. The long-term average price of the VIX is 20.  Anything above 20 typically implies a volatile market.  However, markets tend to be most comfortable with the VIX at 15 or under.  Since the beginning of 2013, the index has only spiked above 20 four times – and each time was just for a day or two before dropping. It's the lack of recent activity above the 20 barrier that makes this recent trade so meaningful. Here's the deal… A trader purchased 150,000 May 22 calls on the VIX while simultaneously selling 150,000 May 30 calls.  This strategy is usually known as a bullish call spread. Selling the higher strike reduces the cost of the spread but caps the potential gains. In this case, the entire spread cost $0.53.  That means the trade breaks even if the VIX closes at $22.53 or above on May expiration.  If this VIX continues to hover around 14 or 15, that means the VIX would have to spike nearly 60% from current levels. What's most impressive about this trade is the investor dropped nearly $8 million to make it happen.  That's a lot of cash to wager on such a big jump in volatility. However, the upside potential of the trade is huge.  Should the VIX climb to 30 or above by May expiration, the strategy would earn a whopping $112 million! So if someone with that kind of capital is betting on such a prominent spike in volatility, does that mean we need to worry?  Is there a major selloff in our future? Perhaps, but remember, it could also be a hedge.  $8 million would be a very reasonable hedge against a multi-million dollar long stock portfolio.  And, recent data suggest VIX calls are actually a cheap hedge relative to S&P 500 puts. I'd say it's more likely the trade is a large tail-risk hedge rather than a flat-out bet on an increase in volatility.  Yet, there's still plenty of global economic and political risk out there.  As such, it definitely makes sense to keep an eye out for trades like this… and it's not such a bad idea to put on a hedge for your own portfolio. Yours in Profit, Gordon Lewis This is going to be the year of the Penny Stock! More and more investors are realizing that the so-called blue chip stocks are a waste of time… they are incredibly expensive to invest in and the share price moves very slowly… if at all! Smart investors are looking for alternatives to invest in and Penny Stocks are a great alternative to the "blue chip blues".  Want to find out why? 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