A pattern of huge, near-daily trades on the VIX is turning heads in the options market. The money-losing trades in question have been purchases of call options on the CBOE volatility index. These represent bets that market volatility is set to rise, and to a lesser extent, that stocks are set to fall. Sussing out the actions of an institutional trader based on public information about options trades can be difficult, if not impossible.
But this trader made it easier by leaving a clue out in the open. So in other words, they don't care too much what the strike is; they just pick the option that's worth 50 cents. These options will expire worthless unless the VIX skyrockets 82 percent in a bit more than a month and a half, and will lose money unless the VIX closes above In terms of the number of contracts, it was the single biggest trade of the day on any index or stock.
And that wasn't all. Unsurprisingly, this strategy appears to have a marked effect on the overall market for VIX options. Total VIX call open interest has risen to an all-time high thanks to 50 Cent's purchases, Chintawongvanich said.
Ironically, the huge bets on the VIX could end up dampening volatility. So is this the case of a huge hedge fund quixotically betting it all on a volatility spike in the near future? Perhaps, but the story is almost certainly not that simple. Go out and do it, and I don't care what you do — just spend this much money. Weinig theorizes that while buying VIX calls, 50 Cent is also betting against volatility in another form, such as VIX futures — which have indeed seen their share of shorts spike recently.
Selling futures "would cover the carry cost of the options, while still maintaining a nice tail hedge in an upside shock to implied volatility," Weinig wrote. As we haven't seen this in some while, our 50c friend remains unscathed for the time being. Or, a bit more exotically, it may represent part of a fund's outright bet on a particular sort of volatility environment.
It may be impossible to say for sure. At the same time, it's worth noting that tracking down 50 Cent's motives may provide little in the way of useful information. The dollar was volatile in Friday trading but could catch a bid next week ahead of the employment report. Stocks fell after a report that Michael Flynn was directed by Trump to talk to Russians sent investors on a wild ride.
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