Giant VIX Options Trades Bet That Stock-Market Calm Won’t Last

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.

Giant VIX Options Trades Bet That Stock-Market Calm Won’t Last

“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.”

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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.

©2021 Bloomberg L.P.

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