Door Finally Shuts on October VIX Options

A trick, or a treat? The answer depends on which side of the October VIX calls traders found themselves as these volatile contracts logged their final trading day Tuesday.

With a late-day drop for stocks, the S&P Volatility Index, or VIX, had a near-flat close with Monday, ending the final day of the October contract at 53.11.

To say that the close was virtually unchanged is not to say that it wasn't noteworthy, as the north-of-50 reading in the volatility index represents a panic level when viewed against the history of the index as a whole -- even though it's a major decline from the highs of the month, visited just last Friday.

Traders who were short VIX contracts were able to close out those positions profitably Tuesday in most cases. Take, for example, the October 65 call, which traded more than 20,000 times, with the bulk of the traffic representing contracts purchased as the issue lost nearly 90% of its value from Monday. These calls likely were bought back by individuals who sold the contracts at far more elevated levels and who had both the resilience and the backbone to see the position through.

But there was no paucity of volatility bulls either, as evidenced by significant buying interest in November 70 calls, where traders entered long opening positions in this now deep-out-of-the-money strike. Roughly 70% of the volume came from buyers ostensibly hoping that the value of these long-shot strikes will shoot higher in concert with a possible new test of the recent lows for stocks.

Similar contrarian angling in out-of-the-money calls was seen earlier in the session in Texas Instruments ( TXN), which grappled with a 6% decline following its morose earnings outlook. Option traders played the other side of the earnings move, buying TI's January 20 calls on volume that more than tripled the open interest after the cost of buying calls at this strike was cut almost in half.

Earlier in the session, RealMoney subscribers got the heads-up on what looked like volatility-bullish positions trading in EMC ( EMC), which is due to report earnings Wednesday.

We noted that implied volatility in EMC options seemed unusually subdued compared with the historic volatility reading for the stock. That may have elicited some interest in the kinds of directionally neutral, but volatility-bullish, trading strategies that can be prohibitively expensive ahead of earnings, when implied volatility tends to be very high.

Over the course of the day, implied volatility in EMC options rose 22%, and prices for contracts to sell the shares at or below Tuesday's closing price rose sharply, even despite positive action for the stock by day's end.

At the time of publication, Darst had no positions in the stocks mentioned.

Rebecca Engmann Darst is the Portfolio Manager for TheStreet.com?s Options Alerts Portfolio newsletter and an equity options analyst for RealMoney Each Thursday at 6:30 a.m. EST, she delivers the early-morning lowdown on option volume and sector trends on CNBC's "Squawk Box." Prior to her work in the equity options market, she spent seven years in Scandinavia as a Copenhagen-based chief reporter for a European Commission news service, correspondent for Spanish daily El Mundo and Radio Netherlands, followed by stints at Nordea Bank and Saxo Bank.

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