U.S. stocks turned sharply lower at midday, as reports hit that former national security advisor Michael Flynn pleaded guilty over lying to the FBI, and agreed to cooperate with a special counsel investigation into possible Russian collusion in the 2016 U.S. presidential election. The quick decline in stocks sent the CBOE Volatility Index (VIX) — or market’s “fear gauge” to its highest point since Aug. 21 earlier — and has options traders blasting the iPath S&P 500 VIX Short-Term Futures ETN (VXX), with the volatility ETN last seen up 4.3% at $33.34.
In the options pits, 210,781 calls and 167,978 puts have traded — nearly three times what’s typically seen at this point in the day, and total volume pacing in the 95th annual percentile. Nevertheless, that’s still just over one-quarter of the 12-month high of 1.33 million VXX options traded in a single session back on Aug. 11.
Today, though, the action is being dominated by eleventh-hour options traders, with strikes in the weekly 12/1 series accounting for each of the five most active options. It looks like volatility traders may be buying to open new positions at the 33-, 35-, and 36-strike calls, expecting another big surge in volatility by expiration at tonight’s close.
Elsewhere, it looks like one trader sold to open 10,819 weekly 12/22 50-strike calls for $0.49 apiece, resulting in an initial net credit of $530,131 (premium collected * number of contracts * 100 shares per contract). This also represents the maximum potential reward, should VXX settle below $50 at the close on Friday, Dec. 22. Risk, meanwhile, is theoretically unlimited on a move north of the strike price.
If this trader is indeed a call writer, they are likely looking to take advantage of inflated premiums. VXX’s 30-day at-the-money implied volatility has spiked 19.6% today to 71.4% — higher than 74% of all comparable readings taken in the past year, meaning heightened volatility expectations are being priced into short-term premiums.
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