Trader appears to buy about 200,000 contracts via block trades
Trade happened as VIX Index hovered near a one-year low of 17
As calm descends on a U.S. stock market that’s posting one record after the next, it appears that one options trader is making a big bet that the serenity is not going to last.
Somebody shook up options screens Thursday morning with a wager that the VIX Index will rise toward 40 -- and won’t be lower than 25 -- in July, up from about the 17 level where the volatility gauge currently trades. The trader appears to have made several block trades, buying a total of about 200,000 call contracts. That’s almost as big as the total daily volume of VIX calls, based on the 20-day average, data compiled by Bloomberg show.
Concerns about everything from a looming tax hike to the pace of the economic recovery and rising inflation have traders concerned that the current calm in the stock market is going to be short-lived. With the cost of protection dropping amid the market’s ascent, some are loading up on protection in case things turn south.
Bet that volatility will rise toward 40 in July comes as VIX hovers below 17
“With VIX being priced in the low 17 area, I would imagine we would see more of these larger-sized bets going forward,” said Kris Sidial, co-chief investment officer at Abrus Group. “I think smart money understands that, although volatility has contracted a lot in these last two months, we are still seeing signs of excess market fragility appear from many different angles.”
The trade sent volumes soaring and helped make call options on the Cboe VIX Index about four times more active than puts earlier in the day, a level that was last seen in late August 2020. All told, about 1 million in combined VIX options traded on U.S. exchanges as of 2:25 p.m. in New York, the most since mid-February. That as the gauge of projected 30-day price swings in U.S. equities, derived from out-of-the-money options, hovered at 16.9.
The trader likely made the purchase through several tranches, first buying 100,000 contracts in two block trades, then coming back for 100,000 more. They paid $3.40 for calls at 25 and received $1.30 for selling 40 calls.
The trade comes as a rising S&P 500 Index makes hedging inexpensive. The cost of options protecting against a 10% drop in the biggest exchange-traded fund tracking the S&P 500 index a month from now relative to bets for gains of the same magnitude is the lowest since late February 2020, just before the pandemic drove U.S. equities into a bear market at the fastest pace on record, data compiled by Bloomberg show.
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