VIX Call Options As Put Options

by: Larry MacDonald

The VIX call options were closed on Friday for a 500% advance during the past three weeks (could have been an 800% advance if had caught the high price on Friday). As well, a position in the VIX put options was opened when the VIX flirted with the 30 level during the day.

I didn’t wait for the 35 to 40 range to buy the puts as planned (see previous posts: July 23rd, May 8th) because they didn’t seem to be falling much in price during the downdraft, suggesting traders were beginning to price in a VIX peak. There might be even greater VIX spikes in weeks ahead but I can average down (or cut my losses, depending on the course of events).

The particular puts purchased were the Sept 20s at a price of $1.15. In hindsight, this may have been too aggressively out of the money. Anyway, it’ll be interesting to see what they do over the next few weeks. Hopefully, investors’ fears will have subsided enough by mid-September to give them a nice gain.

It was interesting to see the market rally in the last hour of trading on Friday. The previous three Fridays, there were sharp sell-offs in the last hour. Maybe that indicates the beginning of a shift in sentiment? But of course, it wouldn’t be surprising to see a few more subprime dominoes fall – but maybe the market won’t freak out as before given central banks are stepping up to the plate and injecting liquidity into the system.