Volatility Sellers Return to Market With a Vengeance

(Bloomberg) -- Brave volatility traders are betting that lightning won’t strike twice.

Two of the three most active options tied to the iPath S&P 500 VIX Short-Term Futures exchange-traded note (VXX) on Monday were way out-of-the-money calls. The major explosion of open interest in these options occurred in transactions that took place closer to the bid than to the ask price, which implies that this was motivated selling rather than fresh bets on another volatility spike.

Volatility sellers are likely emboldened by signs the market’s fever is breaking. The Cboe Volatility Index -- often called the "fear gauge" -- has roughly halved from last week’s peak, and U.S. stocks are up nearly 5 percent from their Feb. 9 lows.

Volatility Sellers Return to Market With a Vengeance

The most potentially profitable time to sell volatility -- assuming it subsides -- is right after a major shock. VXX aims to track the daily performance of short-term VIX futures contracts, and got as high as $56 amid last week’s market mayhem and escalation in volatility.

The open interest in call options with a strike price of 80 that expire in March soared to nearly 26,000 from 16. Two large block trades accounted for the majority of this expansion. Similarly, open interest in April 90 calls jumped to 23,057 from 222.

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