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Aurora, Il USA
Experience: Advanced
Platform: TradeStation
Trading: futures
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Options traders opened new positions to capitalize on declines in the market's fear gauge Tuesday, as daily volume in VIX put contracts hit an all-time high.
Options on the Chicago Board Options Exchange Volatility Index commanded atypically heavy traffic, as traders established new positions in put contracts that profit should U.S. stocks see fewer large-scale, frenzied moves over the next few months.
Traders tend to buy call options on the VIX to protect stock portfolios from shocks that jolt equities lower. Market watchers said Tuesday's emphasis on VIX put options could signal expectations for less volatility.
Tuesday's daily volume in VIX put options was the highest on record, according to options market data provider Trade Alert. Put options on VIX futures outpaced call options at a rate of nearly three-to-one, a major reversal of recent trading activity. On average, call options on VIX are more active than puts.
A trader in VIX options set up one of the session's largest-single trades in the options market, purchasing a block of more than 55,000 Nov. 25 VIX puts to establish a new position. Nearly 140,000 of the contracts changed hands by late afternoon. Options on the VIX are based on futures. VIX futures maturing in November fell 0.7% to 33.40.
"The way I would interpret it is not necessarily as confidence [that] we're moving back toward lower volatility," said Dominic Salvino, a VIX-options market maker at Group One Trading who sits at the center of VIX trading on the floor of the Chicago Board Options Exchange. Rather, he said, "this is protecting against that possibility. This is more protection if volatility comes crashing down."
Salvino said he has observed greater interest in VIX puts that profit from declines in volatility in recent weeks, a trend that was epitomized in Tuesday's amplified volume.
Opening put buyers targeted declining volatility at other strikes. More than 31,000 Nov. 26 puts traded, as did more than 26,000 Jan. 25 puts. January futures fell 0.2% to 33.00.
"The overall flow seems to reflect some expectations that VIX will move back toward the mid-20s in the weeks ahead," said WhatsTrading.com options strategist Frederic Ruffy.
The VIX uses options prices in the Standard & Poor's 500-stock index to gauge market uncertainty. The VIX has traded at extremely elevated levels for the last two months, as Europe's sovereign-debt situation and worries about global economic growth have prompted choppy trading.
The index has traded above 30 since Aug. 8, a session in which it hit 48, a two-year high. It tends to rise when stocks fall and has a long-term average near 20.
The VIX flirted with its recent high early last week, but has fallen sharply over the last week. The VIX is down 22% in October. The VIX edged down 0.5% to settle at 32.86.
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