Weekend Review – 4/6/2014

Barron’s

The Striking Price column mentioned a trade the came through the VIX pit on Wednesday last week.  There was a buyer of 30,000 VIX May 16 Calls that also sold 30,000 VIX May 26 Calls.  No pricing was given, but I did write about a very similar trade from Friday in the previous blog to be posted to this site – a buyer of over 40,000 VIX May 18/25 Call Spreads that paid 0.61.  The idea behind these call spreads is as a hedge against any sort of stock market correction.  Selling the higher strike call lowers the cost of the trade a little.  It also caps the potential profits of the trade, but since VIX has not traded higher than the mid-20’s for almost 2 years they may not be giving up too much in the form of profits is there is a spike in VIX.

Options Action –

The show started out discussing the trade I just mentioned above and in the blog that preceded this one the buyer of the VIX May 18/25 Call Spreads.  It was noted the cost of this trade was about $2.5 million and it was most likely a hedge being put on by a money manager with much more than a $2.5 million portfolio being hedged.  When you hear about big VIX trades like that, the trader is most likely a hedger.

The first trade was based on being concerned about the overall market in the form of a bear put spread on the SPDR S&P 500 ETF (SPY – 186.40) that uses options that expire on June 30 also referred to as quarterly options.   Specifically the SPY Jun 30th 185 Put is purchased for 4.60 and the SPY Jun 30th 178 put is sold for 2.60 and a net cost of 2.00.  If the S&P 500 has a nice correction and SPY is under 178 at the end of the second quarter the result is a 5.00 profit.  Whenever I hear SPY option trades I always think SPX – the comparable SPX trade would buy the SPX Jun 30th 1850 Put and sell a SPX Jun 30th 1780 Put.  Do keep in mind you get ten times the exposure and cash settlement if you go the SPX route.

The second trade was on a bellwether of the technology industry Oracle (ORCL – 39.98) and was also a bearish one.  Noting that growth stocks have been leading the market lower it was suggested to buy a ORCL Jun 40 Put for 1.60 and sell a ORCL Jun 37 Put for 0.60 and a net cost of 1.00.  The feeling is ORCL just experienced a ‘false breakout’ and that the stock should settle back down to the 36 – 37 price range in the near future.

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Russell Rhoads, CFA

CBOE Options Institute

Russell Rhoads, CFA, is a Senior Instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and…

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