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Massive VIX Trade Looks Like a Defensive Position

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2014 is well underway and as the 'polar vortex' headlines melt away, trader's focus is back on US and global economic conditions, tapering and the slew of earnings data set to be released over the next two weeks. Alcoa (AA) is typically considered the 'start' of earnings season, and their release last night has shares looking down about 5% pre-open Friday. While that move is double the typical gap in AA, option The AA weekly straddle closed near 5%, showing that Friday's move was already 'priced in' to the options.



Supercap financials JP Morgan (JPM), Wells Fargo (ticker), Bank of America (BAC), Citigroup (C) and Goldman Sachs (GS) report next week, just ahead of Jan expiry and then we start to get more tech names- including eBay (EBAY) and Netflix (NFLX).

While its early, it seems that 2014 has started with a more cautious mood in the equity markets with the S&P 500 relatively flat on the year and implied volatilities firming up. A massive CBOE Volatility Index (VIX) call spread traded yesterday, with a buyer of the Feb 16-20 call spread 110,000x to open a new position. Since VIX calls are equivalent to SPX puts, this is a defensive position that appears to indicate much more concern about a pullback (and/or spike in volatility) than seen through much of 2013.

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At the time of publication, Henry Schwartz held no positions ion the stocks or issues mentioned.


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