BUYSIDE STRATEGIES VOLATILITY VIX Weekly Puts Volume Strong Lately For A Surprising Reason MAR 25, 2020 By Russell Rhoads While reviewing recent trading activity in Cboe Volatility Index options I started to notice some significant trades using VIX weekly put options. VIX weeklies typically account for 4% to 8% of daily volume, but usually the volume is dominated by calls and not puts. Running some quick numbers available from The Options Clearing Corporation shows that March 2020 is on track to be the first month where more VIX weekly puts than calls traded on an average day. Percent Average Daily Volume VIX Weekly Calls And Puts By Month Jan 2019 – Mar 2020* Data Source: The OCC We often think of trades in weekly options occurring when there are just a few day remaining until settlement. This is not the case with the current increase in VIX weekly put trading. The expiration series that experienced the most trading were the April 1 options with a good portion of the trades occurring in late February or early March, when spot VIX was starting to move to elevated levels in response to the unfolding coronavirus situation. One option contract that got a lot of attention was the VIXW Apr 1 23 put. In fact, as of March 24 that contract has highest open interest of any VIX option. VIX Option Open Interest As Of 3/24/2020 Data Source: Trade Alert Other weekly VIX puts that saw strong volume include the March 25 20 put, 21 put, 30 put and 32.50 put, all of which expired out of the money with March 25 VIX settlement coming in at 62.25. In addition to the April 1 23 put, the 20, 22, 29, and 30 strike puts have seen some strong activity, with much of the trading coming a few weeks ago. The three biggest trades using the VIX Apr 1 23 puts occurred on February 28, March 3, and March 5 with large block trades occurring on each of those days. On February 28 55,248 traded, on March 3 68,397 traded and on March 5 62,951 contracts traded. The chart below shows this time frame in context of spot VIX and the Apr 1 VIX futures pricing. VIX And Apr 1st VIX Futures Daily Pricing 2/13/2020 To 3/24/2020 Data Source: Cboe Global Markets Digging a bit into these large trades it appears each of them were sales of the put options. Although using the tape it is impossible to be certain, the February 28 and March 3 trades did not appear to be part of any spread trade. The largest block for the VIXW Apr 1 23 put on Feb. 28 was 41,450 at 1.50 with about 9,000 more contracts trading around the same time at prices between 1.50 and 1.51. On March 3 68,143 of the April 1 23 puts were sold for 0.90, again in a trade that did not appear to part of a spread trade. The final date with large volume, March 5 had someone sell 48,906 of these puts at 0.65, but there was also a sale of the same number of May 20 32.50 calls at 1.45. There were a few other moderately-sized trades on March 5 that sold both the Apr 1 23 put and May 20 32.50 calls at similar prices. Most of the other March 25 and April 1 put options mentioned above were opening sales as well. VIX traders are a smart group and they often find new ways of using the various listed VIX instruments based on different environments. The case here appears to be selling out-of-the-money puts when spot VIX is at a dramatic premium relative to the VIX futures that share expiration with the option contracts. For instance, on Feb. 28 the April 1 future closed at 25.75 while spot VIX finished the day at 40.11. On March 3 the April 1 contract settled at 26.775 while the VIX close was 36.82 and finally on March 5 VIX closed at 39.62, a premium of over 10 points to the April 1 future settlement of 29.15. Typically bearish VIX trades are implemented based on the VIX future premium relative to spot VIX. It appears that some traders are using the same approach to bullish VIX trades when the future is at a significant discount to spot VIX and also taking advantage of multiple expirations to match a particular outlook on the direction of VIX.