Betting for or against volatility is really unique in its own way. I bought July 2010 put options on the CBOE Volatility Index with a 19.00 strike. After last week’s correction, I was shocked as to how high the VIX had spiked and wrote about that here. That move was not warranted due to an improving economy domestically, strengthening balance sheets, a better labor market, and so on.
As I write this, the VIX is trading at roughly 25. If looking at the May call options that trade 4% above the May 25 strike point (the May 26 calls), the bid – ask spread is 1.00 – 1.05. Now, if looking at the May put options that trade 4% below the May 25 strike point (the May 24 puts), the bid – ask spread is 1.05 – 1.20. This tells me from just looking at the premiums, betting on the downside to the VIX is more expensive (evident with the 1.20 ask rather than the 1.05 ask). That makes sense as the market has been gaining back some value following its decline from last week. However, the discrepancy is not great enough to make a solid market predication. Therefore, let’s look a bit further out to the July options to give us a more lucid picture.
When looking at the July call options that trade about 22.5% above the current price of the VIX at roughly 24.75 (just minuets after writing the first couple paragraphs), we see the July calls with a 30 strike. The bid – ask spread is 2.75 – 2.80. The July put options that trade about 22.5% below the current VIX price leads us to the puts with a 19 strike. The bid – ask spread here is .45 – .55. In this case, it is much more expensive to be long the VIX a couple months out. This suggests that more fear will return in the marketplace in the midst of the summer.
In conclusion, there are two ways to read this analysis when considering the July options. First, the July put options are very cheap relative to the July calls. If the market continues to ascend higher, investors can be in good shape if acquiring VIX July puts. I remember that I wanted to buy call options on the VIX a couple weeks ago, before the correction, because those options were so cheap, just like the VIX July puts right now. In addition, buying those calls would have hedged my long positions. The second way to read this analysis is that the sentiment of ‘sophisticated’ investors hints that more gloomy times are coming in the months ahead and therefore investors should be concerned about their longs and start contemplating how to restructure their portfolio to fight a potential storm.
For more information on the CBOE Volatility Index, click here.
Full disclosure: Long VIX Puts at time of writing.
