VIX Options Trade Outlines Need for Volatility ETFs

A trader in VIX options is is betting that a 2008-like volatility spike is on the horizon, which puts ETF investors on notice that volatility-focused funds should be on their radar despite the celebratory champagne so far in third-quarter earnings.

Earnings reports have been largely positive thus far as the S&P 500 set a record high in Monday’s trading session, putting investor fears of a recession on pause. Combine that with positive news that a U.S.-China trade deal is progressing and the bulls are running rampant in the capital markets.

However, one trader is taking the other side in a big way. Per a Bloomberg report, trades “in call options on the Cboe Volatility Index, known as the VIX, outweighed puts by more than 2-to-1 on Friday with the index at its lowest level since July as stocks rallied. The standout trade was one block of 50,000 April $65 calls that were bought for 10 cents. Those contracts would imply a surge in the VIX of almost 500% from its current level.”

In essence, the trades are basically calling for a perfect storm where a set of events set the markets on fire.

“While the magnitude of the strike price is remarkable, Macro Risk Advisors derivatives strategist Maxwell Grinacoff said the April expiration date is even more interesting,” the report said. “That time frame could capture the impact of a potential recession, a breakdown in U.S.-China trade talks and a variety of political risks linked to the Democratic presidential primary and impeachment proceedings against Donald Trump, he said in an interview.”

VIX chart

Minimizing Volatility with ETFs

Investors can blunt the impact of a potential spike with minimum volatility ETFs like the iShares Edge MSCI Minimum Volatility USA ETF (USMV). Low volatility is a trend that has been growing and could persist as the propensity for market movements ahead looms.

Per a CNBC report, “low-volatility exchange-traded funds in particular have attracted some $25 billion in inflows, according to, signaling that investors are getting more comfortable with slicing-and-dicing their holdings in hopes of creating a better risk profile.”

USMV seeks the investment results of the MSCI USA Minimum Volatility (USD) Index, which measures the performance of large and mid-capitalization equity securities listed on stock exchanges in the U.S. that, in the aggregate, have lower volatility relative to the broader U.S. equity market.

Other volatility-minimizing ETFs to consider include the iShares Edge MSCI Min Vol EAFE ETF (BATS: EFAV) and the iShares Edge MSCI EM Minimum Volatility UCITS ETF (BATS: EEMV).

For more market trends, visit ETF Trends.