Traders Beware: The `VIX Elephant' Is Due to Stampede the Market By Luke Kawa (Bloomberg) -- Derivatives traders should brace themselves for massive volumes in volatility-linked options. An options behemoth that’s been betting on a modest rise of the Cboe’s VIX index -- and traded 3.15 million contracts so far this year -- may roll over a huge position today or later this week based on trading patterns going back to July, Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, wrote in a note. Rolling the trade over -- closing the old legs and refreshing the new ones -- would likely include more than 2 million contracts, around three times the average daily volume of VIX options, according to Cboe data of the past 20 sessions. The trader, who Chintawongvanich has dubbed the “VIX Elephant,” has bought 262,500 December VIX puts with a strike price of 12 and is long a VIX call spread that profits if December futures contracts expire between 15 and 25 -- selling 525,000 VIX calls with a strike price of 25 and purchasing 262,500 VIX calls with a strike price of 15. (.. )
If Dec VIX settles between 12 and 15, this guy stands to lose about up $40,000,000? using today's prices as an assumption of the trade cost. The trade alone costs a debit of about $40,000,000 plus the margin on the naked calls. Long puts plus the call ratio spread actually means the breakeven to the downside assuming today's prices (we don't know pricing at time of trade so big assumption using today's pricing) is a VIX settlement of about 10.50 or below (look up the last time VX settled below 10,50 in DEC) and upside breakeven is probably about 16.50 (anything is possible if something unexpected happens). So by my estimation this guy losses money between 10,50 and 16.50 settlement and based on current VIX @ 10.59 and DEC VX @ 12.15 this trade, assuming this magical "elephant" exists, is money thrown out the window unless there is another trade this is hedging. Maybe this was legged into for better cost than we see today but enormous risk bet on DEC settlement getting up over 19 to make this worthwhile. Back of the envelope math but seems like an expensive lottery ticket to spend about $40,000,000.
Remember that this trade might not be a standalone trade. It could be a hedge to long portfolio. It could be a hedge to short volatility positions. This is why UOA (Unusual Options Activity) MEANS ABSOLUTELY NOTHING. There is zero evidence that you can actually make money based on UOA.
Kim - Thanks for these words. But does this mean I should be more worried or I should be less worried? Or just have another glass of red?
This is an old trade, which has been already rolled once. There's a whole older thread on it. The "massive volume" due to this position being rolled the first time didn't do anything special, so I am not really sure what the excitement is all about.
- if I recall correctly, he was a seller of the 12 puts (sell 12P buy 15/25 1x2) - when he rolled the trade, it was 50ish delta and it’s kinda same delta now - 250k puts is 25k futures when we get below the put strike so that’s a meaningful fraction of DV if the option is pinned - without a pin, it’s kinda a non-event, the impact is going to be trivial - when/if she/he rolls, the MMs will have to take down a fairly large 1st/2nd spread but they don’t have to do it instantly
The S&P 500 is hitting all-time highs this year. The market is up about 20% with a Sharpe ratio of 4+. Bloomberg et al. must be bored and trying to drum up clickbait. Otherwise headlines would be boring. "Everything is going better than ever. Markets have never been more bullish. Markets are calmer than ever. Everything is great! Back to you, Martin!"
Should you be less or more worried? Good question. The simple truth is the VIX spike will come at some point. We all know it. It's not matter of IF but matter of WHEN. But the WHEN is very important here. If you just go long VIX (via futures or one of many existing ETFs), you need to be very good with your timing, otherwise VIX contango will work against you and the position will slowly bleeding money. My biggest mistake in 2017 was trying to time the VIX spike. When VIX went below 11, I asked "how low can it go and how long can it stay there?" Guess what - it went to 9 several times, and it stayed below 11 much longer than most people expected. I got it right couple times, but overall it was a losing proposition in 2017. I also rolled some of the trades few times, but when you roll, most of the time you do it for a debit - again, due to contango (more distant futures are more expensive, so the options are more expensive as well).
@El OchoCinco - the article is wrong I think. I am pretty sure he was a seller of the put on the original trade and rolled it the same way. As far as I can remember, the original trade was done for a small credit but he must have paid something to roll it. Two interesting data points - this is a a very big real money player (I have a suspicion who that is) - the original trade as well as the roll were done via upstairs brokers instead of dealer desks (some people were upset, lol)