Big VIXin’

Interesting trade yesterday in VIX products, as noted by Options Monster about 3 minutes into the video.

Customer sells 45,000 November 26 calls to buy 45,000 December 32.50 calls for $10.95.

What’s his bet? Currently the Nov. futures trade at an 8 pt. premium to Dec. futures (45 vs. 37). So if that spread evaporates, he figures to win big.

One way for that to happen of course is for the VIX to get slammed. If the VIX drifts back to the mid 20’s around November expiration, he’s pocket the $10.95, plus whatever residual value is left in the Decs.

He could theoretically make money on strong volatility as well if the marketplace is convinced that high volatility is the new norm. The spread would narrow in that case too, and the extra options premium on the Decs would evaporate. Remember he’s getting a $4.50 premium for the spread and there’s no cost of carry involved, Novs turn to cash. In fact the Nov 32.5 puts now carry less than $1 in premium.

So it’s almost a bet on the volatility of volatility over the next month. Interesting.