Is rising volatility here to stay?

July 8, 2014 12:00 PM

Is rising volatility here to stay? Not so, according to a chunky play using Vix options on Tuesday morning.

As the CBOE Vix index surges for a third day (+9.44% to 12.40)--and it fell to an astoundingly low 10.30 following Thursday’s employment report--an investor bought puts expiring at the end of the week suggesting the current bout of selling will quickly abate. The investor bought 144,000 just in-the-money put options with a strike price of 13.0, currently trading at around 90-cents apiece and sold the same expiration 16.0-20.0 call spread for a small credit in the same volume.

The net effect is to reduce the premium paid for the puts, which would help the put side of the play break even faster in the event that selling gives way to buying causing volatility to quickly subside.


Chart: Vix Index has shot up off its Thursday low.