Volatility buyer emerges

The CBOE Volatility Index (VIX) has returned to unchanged at 11.82 Tuesday as nerves steady in the benchmarks. The S&P 500 index is still lower by 3.57 points, or 0.18%, yet well off its earlier lows.

It appears one investor paid 51 cents to lock into the prevailing low rate of volatility by buying 40,000 call spreads. The value of a call option on the Vix may rise in the event that volatility picks up. This investor looked beyond the summer to purchase the sizable chunk of protection by targeting the September 16/21 call spread.

The five-point wide spread would yield maximum potential profits of $4.49 per contract in the event that the underlying index returns to at least the higher strike price of 21.0 at expiration. Of course, such a move is the sort of thing that dreams are made of given muted volatility these days.

However, even a decent several percentage point correction for stocks possibly predicated on the sort of Fed warning offered by Janet Yellen on Tuesday could yield a decent jump in the volatility premium.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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