Bill Luby:  Options volume in iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca:VXX) surged to their second highest level ever on Friday, with 344,777 contracts trading and put volume (56%) outpacing call volume (44%) by an unusually high margin.

The chart below shows the options activity in VXX going back to the beginning of August 2011. Note that record options volume in VXX dates from August 5^th and occurred just before VXX spiked from 30 to the upper 50s. On that day and most of the other high volume days in VXX options the calls (green vertical bars on bottom portion of chart) saw more action than the puts (red bars), as investors were most likely betting on an increase in volatility – or hedging against that potential scenario.

Friday’s volume was unusual, just as it was on January 26^th, in that put volume dominated. On balance, traders generally buy and sell more VXX calls than puts. In today’s session, so far the volumes in VXX options are much lower than they were on Friday and the activity in puts and calls is balanced and relatively calm.

This is not to say that VXX options investors are particularly prescient and should not be considered contrarian sentiment indicators. Instead, I am merely suggesting that there was no panic in Friday’s VIX spike.

In fact, the rumor I heard (via a commenter on the blog) that makes the most sense is that someone who had a position consisting of VIX futures, SPX straddles and the (NYSEArca:TVIX) ETP (and supposedly about 90% of the open interest in TVIX) had their position liquidated by a clearing house – and some of the banks that got wind of what was going on were able to front run that move. Take it all with a grain of salt, but that kind of scenario is a good fit for the prints I saw and the facts as we know them.

Finally, keep in mind that the February VIX futures and options expire at Wednesday’s open. February VIX options are last traded tomorrow, while the February VIX futures are last traded in Wednesday’s pre-market session, from 8:00 – 9:15 a.m. ET.

[source(s): LivevolPro.com]

Disclosure(s): short VXX and TVIX at time of writing; Livevol is an advertiser on VIX and More

Written By Bill Luby From The VIX and More

Bill is a private investor who also authors the VIX and More (http://vixandmore.blogspot.com/)   blog and an investment newsletter from just north of San Francisco. His research and trading interests focus on volatility, market sentiment, technical analysis, and ETFs. Prior to becoming a full-time  investor, Bill was a business strategy consultant for two decades and advised clients across a broad range of industries on issues such as strategy  formulation, strategy  implementation, and metrics. When not trading or blogging, he can often be found running, hiking, and kayaking in Northern California.  Bill has a BA from Stanford University and an MBA from Carnegie-Mellon University.

NYSE:TVIX, NYSE:VXX