VIX Climbs Past a Key Level, Signaling Trouble for Stocks (ETF: VXX, VXZ)

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June 15, 2009 11:03am NYSE:VXX NYSE:VXZ

vix“The stock market’s main fear gauge moved past a key level on Monday, indicating possible troubles ahead for the market. And one options player with deep pockets is making a big bet that volatility will increase sharply, making this a tumultuous summer.  The Chicago Board Options Exchange Volatility Index, or VIX, moved past 30, a mark it hasn’t closed above since June 4. 


A VIX reading of better than 30 generally indicates high volatility that usually accompanies stock market drops.” States Jeff Cox writing for CNBC.

Two ETF’s benefiting from this movement are the iPath S&P 500 VIX Short-Term Futures ETN (VXX) which seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index, and the iPath S&P 500 VIX Mid-Term Futures ETN which seeks to replicate, net of expenses, the S&P 500 VIX Mid-Term Futures Total Return Index.

Jeff goes on to point out the details of an unusual trade: “One trader on Thursday bought 20,000 July VIX calls at the 45 strike and sold 55 strike calls for an overall premium of 42.5 cents in a trade that cost about $850,000 to execute. The net impact is that the VIX would have to beat the 45.42 level by the July expiration for the investor to make money. The VIX hasn’t been past 40 since April 21.”

For the whole story click: HERE


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