It appears that VIX option traders are not being put off by the low level of VIX. Friday’s volume was over one million contracts for the third time in 2014. To put this in perspective, in 2013 there were only 14 trading days where VIX option volume was in the seven figures. In 2012 there were only five trading days with big volume and in 2011 there were only two trading days where volume topped the one million mark. At this pace we should have sixty three trading days where over a million VIX options change hands.
A VIX option trade I found interesting on Friday skipped February (which becomes the front month on Wednesday) and looked to March. There was a buyer of the VIX Mar 19 Calls for 0.84 who then sold VIX Mar 27 Calls for 0.37 and a net cost of 0.47. A VIX spike to 27 at expiration could result in a profit of 7.53 per contract. It has been over two years since VIX saw those levels. Maybe someone thinks the upper 20’s is overdue for VIX.
The S&P 500 dropped slightly on the week as earnings reactions were fairly mixed. Next week is a time period when we get some high profile earnings such as IBM. After a few more reports in the next few days we may have some idea from management teams as to where they think the US economy is headed for 2014. Finally, do remember we get some FOMC news on January 30th which could also provide a jolt to the volatility markets.