This message is exclusively written for Investing.com
Volatility has increased enormously in recent days because the fear of the corona virus has taken over the stock market. The price rose to 27 on 27 February when the shares fell in value. Option traders, however, bet that rising volatility levels will begin to fall in the coming weeks. Some traders have canceled previous bets, while others seem to be making new bets.
It can also mean good news for equities when option traders bet that volatility is decreasing. It may not indicate that a bottom has been reached on the stock market, but it does suggest that the wild and sharp price movements might settle down.
Betting on a reversal
The VIX options that expire on March 18 saw a sharp fall in the number of open call contracts at the 25 strike price on February 27. The open contracts decreased by around 61,000 to around 272,000. According to the option data provided by Trade Alert, the calls are traded on the BID for around $ 3.40 per contract. Given that the calls that were traded on the bid and the open interest rate fell, this is an indication that the contracts have been sold.
In addition, the open interest rates for the calls of 30 June increased by 39,000 contracts. Despite the rising open interest rates, the contracts traded on the bid for $ 0.70 per contract, indicating that they were sold. In this case, it is an indication that a trader is guessing that the value of VIX is not higher than 30 on the due date.
Finally, the open interest rates for the 20 put options that expire on March 18 increased by around 21,000 contracts on February 27. These put on the ASK traded for around $ 1.50 per contract, an indication that they were purchased. As a result, the VIX should fall below 18.50 for the buyer of the calls to make a profit.
Backwardation
There are also signs that volatility levels are starting to fall and are now being priced in the market. The implicit volatility period for the is now in a backward direction, which means that the current implicit volatility in the future will be lower than now.
(Trade Alert)
The VIX itself is also in the reverse direction, with values ??for the VIX expected to fall from 32 at present to around 23 in the next 30 days.
VIX Futures Term Structure
(Vixcentral.com)
More than 30
Historically, when the VIX increases to levels above 30, this usually results in a fall in volatility levels in the weeks that follow. It is unlikely that this time will be much different, and if that is the case, it would seem logical for traders to bet that volatility will decrease in the coming weeks.
If that volatility starts to decrease and the VIX starts to fall in value, this would indicate that the stock market should settle and perhaps even rise again. After all, time helps to heal.
