Intermediate Trade: VIX

The French elections have really seized the overall market. With good reason: Take a look at what has happened to volatility over the last few elections where the "smart money" thought it knew what was going to happen. For this reason, VSTOXX, which is the VIX for the Euro Stoxx 50 (the S&P 500 of Europe) is near 25%. That is really high given that movement in the index over the last 10 trading days has been about 7.5%. That just shows how much fear is built into the market right now.

Euro Stoxx 50 ETF (FEZ) represents the Euro Stoxx 50 here in the U.S. While in the past it was not an active ETF, volume has blown up in this name, with the ETF trading up to an average of 2.5 million shares. Open interest in the options has ballooned to almost a million contracts and volumes are getting near 20,000 contracts a day. Today, a customer bought 28,000 of the April $35.50-$33 put spreads paying $0.65 in what is clearly a hedge against a long stock position. I think we will see much more of this over the coming days.

This action also explains why the VIX has been rallying so much. With premiums at 3.5x the actual movement, it is super-expensive to hedge in Europe. Here in the U.S., the VIX at a cost of only 2x current 10-day movement makes hedging here seem like a steal. At this point, it appears implied volatility is going to have trouble falling, and is likely to catch a bid again tomorrow or Wednesday into the French elections.

I am surprised the VIX April 26 future is only 15. While I think bonds are way overdone, as is gold, I could see VIX options catching a bid for the next week. I can buy the April 26 weekly VIX 18-23 call spread for about $0.30 to $0.35; I think it will be worth $0.75 to $1 by Friday.

Trade: Buy to open 1 VIX April 26 18 call for $0.45; sell to open 1 VIX April 26 23 call at $0.15

At the time of publication, Sebastian had positions in VIX, although they could change at any time.