Big Upside Call Seller** in September VIX Calls

Andrew Keene spotted the original trade, Marty Kearney goes into greater detail on what finally happened.  Enjoy.

VIX is the ticker symbol for the Volatility Index at the Chicago Board of Options Exchange (CBOE). The investor “fear gauge”, VIX serves as a calculated measure by the CBOE on the volatility of at and out-of-the-money S&P 500 options for the upcoming 30 days.  Introduced in 1993, VIX embodies the implied volatility on a wide range of S&P 500 options, calculated from both calls and puts. Traders  may utilize VIX options or futures to balance the risks on their books.

Today, we saw an “Institutional Trade” of 15,000 VIX Sep 28 Calls sold for $.26 vs $15.40 in the Futures.  ** This trade was busted and a different spread (**below) went up instead.

The original trade numbers were as follows:

Their Risk:      Unlimited
Their Reward: $26 per 1 lot
Their Breakeven:  $28.26
Cash Received: $390,000

**The following was the trade that eventually went up:

The trader sold 32,000 Sep. 28 strike calls at $0.26 versus 15.45 in the futures.

Get ready, we have a few items to cover!  What does “Versus” mean?  The trader sold 32,000 calls and bought futures or combo’s.  They wouldn’t do this 1 X 1, but tied to a Delta (the delta of the 28 strike call).  What is the “correct” Delta for these calls?  It looks like the delta would be near .02.  So 2% of 32,000 is 640 contracts…. except each VIX Future is worth 10 options…. so that means the trader might be buying 64 VIX Sep. futures. OK, now we need to define a Combo!  Cash VIX was near 13.50 but Sep. VIX futures were slightly higher, near 15.  To replicate 64 VIX futures contracts with options,  the trader could have bought the VIX Sep. 15 strike call and sold the Sep. 15 strike put (640 times, remember the 1 X 10 ratio!). A Combo is a combination of calls and puts.  Selling the 15 strike put (positive delta of .48) and the purchase of the 15 strike call (positive delta of ~.52) would give you a + 100 delta.  So 64 futures or 640 long combo’s are pretty much the same.

In-the-money “Combo’s” are used in the SPX as well, to mimic an S&P Futures contract.

So at first glance the original trade looks neutral to bearish, but tied to a future or a Combo it gets a little more interesting.

  • optiontradinginsights

    What you described is essentially the synthetic long stock position. Basically mimicking the VIX dollar for dollar(100 delta). You mentioned ITM combos but would’t the ATM (at the money) position be more effective? What is the advantage of an ITM combo over an ATM combo?