The Dow was off more than 350 points at its intraday low
U.S. stocks turned sharply lower at midday, as reports hit that former national security advisor Michael Flynn pleaded guilty over lying to the FBI, and agreed to cooperate with a special counsel investigation into possible Russian collusion in the 2016 U.S. presidential election. The quick decline in stocks sent the CBOE Volatility Index (VIX) -- or market's "fear gauge" to its highest point since Aug. 21 earlier -- and has options traders blasting the iPath S&P 500 VIX Short-Term Futures ETN (VXX), with the volatility ETN last seen up 4.3% at $33.34.
In the options pits, 210,781 calls and 167,978 puts have traded -- nearly three times what's typically seen at this point in the day, and total volume pacing in the 95th annual percentile. Nevertheless, that's still just over one-quarter of the 12-month high of 1.33 million VXX options traded in a single session back on Aug. 11.
Today, though, the action is being dominated by eleventh-hour options traders, with strikes in the weekly 12/1 series accounting for each of the five most active options. It looks like volatility traders may be buying to open new positions at the 33-, 35-, and 36-strike calls, expecting another big surge in volatility by expiration at tonight's close.
Elsewhere, it looks like one trader sold to open 10,819 weekly 12/22 50-strike calls for $0.49 apiece, resulting in an initial net credit of $530,131 (premium collected * number of contracts * 100 shares per contract). This also represents the maximum potential reward, should VXX settle below $50 at the close on Friday, Dec. 22. Risk, meanwhile, is theoretically unlimited on a move north of the strike price.
If this trader is indeed a call writer, they are likely looking to take advantage of inflated premiums. VXX's 30-day at-the-money implied volatility has spiked 19.6% today to 71.4% -- higher than 74% of all comparable readings taken in the past year, meaning heightened volatility expectations are being priced into short-term premiums.