Markets

Volatility bet sees confidence rising

One trader is looking for better sentiment in the market, using the iPath S&P 500 VIX Short-Term Futures exchange-traded note.

The trader bought block of 4,500 VXX December 35 weekly puts for $0.43 and sold an equal number of December 34 puts for $0.17. Volume was more than 5 times open interest in both strikes.

Known as a bearish put spread , the trade cost $0.26 and will earn a maximum profit of 285 percent if the VXX closes at or below $34 this Friday. Given that this instrument tends to move in the opposite direction of the S&P 500, the trade reflects a belief that the broader market will push higher and investor sentiment will improve. (See our Education section)

The VXX is down 5.42 percent this morning after the major stock indexes rallied on strong economic news and lower Spanish bond yields. Another negative for the fund is the fact that the VIX itself has returned to so-called contango, meaning that longer-dated futures cost more than those in the closer months.

As a result, the VXX is destined to lose money as it's forced to roll into more expensive contracts, which in turn lose value as they near expiration. That trend was a drag on the VXX for most of 2010 and the first half of 2011 until the term structure moved to backwardation--the opposite of contango--over the summer.

Overall option volume is twice the average amount so far today, with puts accounting for more than 60 percent of activity.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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