Bullish, Bearish, and Neutral Trades from Today

One of the fun parts of working at the Options Institute is looking into how large traders react to different market environments. Since today was a pretty exciting day in the markets I decided to look at block trading activity from the end of the day today. The result is a bullish, bearish, and neutral trade executed respectively in the Russell 2000, S&P 500, and VIX option markets today.

First, the bullish Russell 2000 trade. With RUT very close to 1228 there was a bullish diagonal spread executed at the RUT post. Specifically the trader purchased the RUT Aug 21st 1230 Calls at 31.00 and sold the RUT Jul 17th 1250 Calls at 6.50 for a net cost of 24.50. The payoff diagram below makes some assumptions with respect to August volatility at July expiration, but when we are looking at calendar or diagonal spreads, the payoff at near expiration always requires some sort of volatility assumption.  In this case the assumption is that IV drops from 18 to 16 for the August option on July expiration date.

RUT 0708 Payout

Note that the break-even is pretty close to where RUT finished the day despite tweaking IV down a little. At July expiration there will still be five weeks remaining for the long August call. I would not be surprised if the idea behind this trade involves taking in some more premium through selling RUT Weeklys based on the trader’s outlook and RUT levels after July expiration.

The second trade I dug out was executed in the SPX pit just seconds before 3:15 which is closing time for SPX trading at CBOE. The reason I’m calling this one bearish is because it will take about a 100 point drop in the S&P 500 for this trade to turn a profit. Also the options expire on the close this Friday or in just two days. The specific trade was a purchase of SPX Jul 10th 1950 Puts at 0.45. The break-even for this trade is about 4.7% lower than today’s close. Either this trader has a pretty bad premonition about the markets or just wants to hedge against a big drop in equity prices over the next couple of days.

SPX 0708 Payout

The final trade comes from the VIX pit and I’m calling it neutral because it would take an outlier move in volatility that we have not seen in years in the VIX arena for this trade to go wrong. As the day came to a close, VIX was at 19.66 and the July Futures were more than a point lower. Someone saw that they could sell VIX Jul 32.50 Calls for 0.25 and purchase VIX Jul 35.00 Calls for 0.15 taking in a credit of 0.10.

VIX 0708 Payout

July VIX expiration is the 22nd so as long as VIX does not go up about 65% and the July futures follow the index to the upside this trade will be OK. If we do get a volatility spike to 35 or higher this trade ends up with a loss 2.40 a spread.  Although if that happens between now and Friday the SPX Put buyer may be able to bail this trader out or at least give him a loan.