CBOE Volatility Index (.VIX) drops .76 to 15.65 and VIX Dec 24 calls, Feb 22 calls, and Jan 17 puts are today’s most actively traded options contracts, being driven by three-way trading. For example, one investor sold Dec 24 calls on VIX to buy the Jan 17 put – Feb 22 call strangle, paying $3.10, 22000X. More than 115,000 contracts now traded in all three options and the actions appears to roll one leg of a Nov 18 – Dec 24 strangle. It’s part of a longer-term trade in which the investor is buying downside VIX puts and upside VIX calls. In this case, the Dec 24 calls are being sold-to-close at 60 cents per contract. The Nov 18 puts are in-the-money and expire Wednesday — apparently still open. Since $4.25 was paid to open the strangle (on Sep 11, 2012), the success of the trade will depend on the settlement value Wednesday morning. It would need to settle below 14.35 for the Nov 18 – Dec 24 strangle to payoff. Meanwhile, the same trade is being opened in the Feb 22 calls and Jan 17 puts, as the investor is buying the upside calls that have expiration one month after the downside puts — probably reflecting the view that the odds of success to the strangle are increased due to the steep term structure of SPX options today and the fact that the options are priced of forward values.
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Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.