The CBOE Volatility Index hasn’t popped above 35 all year, but some traders are betting it clocks 180 over the next few months.
A trader paid $30,000 Thursday for a brash wager that pays off if Wall Street’s so-called ‘fear gauge’ increases more than twelvefold by its Feb. 14 expiration date. Since a version of the VIX started in 1993, the index has never even clocked 100. The closest it came was at the end of 2008 during the Great Financial Crisis, when it hit 89.53 — just half of what the trade at hand is betting on.
The trade, shortly after the start of regular market hours on Thursday, implies the VIX will climb 1100% in the next five months. It’s not the first bet on the seemingly impossible. The same trader or others have opened more than 20,000 contracts of open interest in VIX December options with the same strike price. Twice in the last couple of weeks, 5,000 of those December contracts changed hands, also when the VIX emerged from its summer doldrums to peek above 15.
Of course, in derivatives world, people don’t always make bets on what they think will happen, and the trade could be part of a larger strategy.
“The only logical reason is that they’re short a lower strike call and this gives them some sort of favorable margin or haircut treatment by being long a higher strike call, even if it is crazy out of the money,” said Steve Sosnick, chief strategist at Interactive Brokers.
And say, somehow, the VIX does the unthinkable and hits 180. Then, the options will be considered in-the-money — thus worth something — and somebody, somewhere makes a lot of money. But in such a scenario, the trader might have more pressing problems at hand.
“The problem with betting on the end of the world is that if you’re right, how do you get paid off on it?” asked Sosnick.
--With assistance from David Marino.
This article was provided by Bloomberg News.