Volatility Index® @CBOE #VIX waking up fast: spiked

Key Concepts

• Volatility Index (VIX)
• Unusual Option Activity
• Call Options
• VIX trading ranges (20s, 21, 23.5-24, 25)
• VIX percentage changes (6%, >12%)
• Option strike prices and premiums (February 24 calls at 50 cents, bought for 290)

Volatility Index (VIX) Movement and Unusual Option Activity

The discussion centers on the recent movements of the Volatility Index (VIX), often referred to as the "fear index." The VIX has experienced a significant upward trend, starting the morning around 23.5 to 24, which represented a 6% increase. It subsequently moved above 25, marking a gain of over 12%. While it has eased back slightly, the VIX was trading closer to 21 the previous day.

A notable event highlighted is the unusual option activity observed in the VIX itself. Specifically, there was a substantial purchase of February 24 calls. These calls were acquired for approximately 290 (currency not specified, but implied to be a significant amount given the context of "sizable") when the VIX was trading closer to 20. The speaker suggests that this trade was profitable within a single day, but also posits that the buyer might consider holding onto the position.

Analysis of VIX Levels and Future Outlook

The speaker expresses a growing suspicion that the VIX might find a "sticky" level above 20. The question is posed whether the current VIX levels will remain elevated, potentially moving closer to the 20-25 range. This suggests a concern that the market's perceived volatility might not recede to lower, more complacent levels. The unusual option activity is presented as potential evidence supporting this outlook, indicating a belief by some market participants that volatility will persist or increase.

Technical Terms Explained

• Volatility Index (VIX): A real-time market index representing the market's expectations of future volatility derived from S&P 500 index options. It is often referred to as the "fear index" because it tends to rise when investors are fearful and expect market declines.
• Call Options: A contract that gives the buyer the right, but not the obligation, to purchase an underlying asset (in this case, the VIX) at a specified price (the strike price) on or before a certain date. Buying call options is a bullish strategy, expecting the price of the underlying asset to rise.
• Strike Price: The predetermined price at which the holder of an option can buy (for a call option) or sell (for a put option) the underlying asset.
• Premium: The price paid by the buyer of an option contract to the seller for the rights granted by the option.
• "Sticky" Level: In market analysis, a price level that an asset or index tends to hover around or find difficulty breaking through, either on the upside or downside.

Logical Connections and Conclusion

The discussion logically connects the observed movements in the VIX with specific option trades. The unusual call option activity on the VIX is presented as a potential indicator of market sentiment and future expectations. The speaker's hypothesis that the VIX might become "sticky" above 20 is supported by the fact that significant call option positions were taken when the VIX was at lower levels, suggesting a belief in further upward movement. The conclusion drawn is that the market may be entering a period where elevated volatility is sustained, rather than a temporary spike.