According to a report from the Wall Street Journal, with stocks suffering a second straight day of declines amid growing emerging market turmoil, options traders are increasingly betting that the months of calm in the stock-markets fear gauge won’t last much longer.
Total bullish bets on the Chicago Board Options Exchange Volatility Index–which reflect expectations of a spike in market volatility– reached a record this week of 8.4 million contracts at January options expiration Wednesday. The record is 9% more than the prior high reached in March, when twitchy investors looked to hedge the best start to the year for the Dow Jones Industrial Average since 1998.
“There have been a lot of buyers this week across months, and a lot are buying in big size,” said Mike Palmer of Group One Trading, who sits at the center of the VIX pit at CBOE. With the VIX so low, and volatility of the index itself low too, investors “can get a lot of bank for their buck,” he said.
Still, the trading was orderly and didn’t show any signs of panic, Mr. Palmer said.
The VIX jumped 7.2% Thursday, and was up big again Friday, adding 14% to 15.67 in recent trade. But even with the strong back-to-back gains, the index was low relative to its 20-year average of about 20.50.
The index is calculated from the prices investors pay for options on the S&P 500. It tends to rise as stocks fall, thus boosting demand for contracts that can hedge losses.
About 81% of VIX options trading Thursday was in call options that profit should the VIX rise above a set price, with the most actively traded contract looking for the index to reach a four-month high over the next four weeks.
Nearly 94,000 February 16 call options traded during the session, accounting for about 12% of total volume. Volume in that contract was helped by the largest VIX trade of the day, which involved the purchase of 18,763 February 16 calls. At a price of $70 per contract, that bet needs the VIX to be above 16.70 when the options expire on Feb. 19 to profit.
