Even as the CBOE Volatility Index sits at historically low levels below 10, an institutional investor on Monday bought 100,000 lots of July VIX call options with a strike price of 25. He paid 12 cents a pop. The same person simultaneously sold an equal amount of calls with a strike price of 30 for 7 cents each. The same day, the trader nicknamed 50 cent loaded up on protection if the VIX heads to 25.
Though it’s been one year since the VIX breached 25, the trades are the latest sign that investors aren’t convinced the period of unusually low volatility will persist. The common thread: institutions are betting that if the enduring low-volatility regime breaks, it will shatter in a big way given the profitability of “short vol” strategies and the proliferation of exchange-traded products that allow retail investors to take such a position.
While the purchase of the call options at 25 underscores the rising concern, the second part of this $500,000 trade, known as a call spread, mitigates the cost of betting on market turmoil by capping the potential upside should the VIX spike suddenly. It’d have to more than double from current levels over the next three weeks for this trade to become profitable.
The call spread trade is a far different approach than what the volatility buyer who shares a nickname with Curtis Jackson III seems to be doing -- that is, maintaining a relatively stable amount of exposure against a major risk-off move. ‘50 Cent’ purchased on Monday morning 50,000 lots of the September VIX calls with a strike price of 25 at $0.52 apiece.
The VIX was flat at 9.90 as of 11:10 a.m. in New York.