An investor paid about $7.95 million for a trade that will pay off if the Chicago Board Options Exchange Volatility Index rallies at least 60 percent by May.
The trader bought 150,000 bullish contracts on the VIX expiring in May with a strike price of 22, while selling the same number of May 30 calls in a strategy known as a call spread, according to New York-based Miller Tabak & Co. The trade cost 53 cents to put on for each contract and it will profit if the volatility gauge rises above 22.53 from the current level around 14, data compiled by Bloomberg show. It has a maximum payoff if the VIX more than doubles to 30.
“It was one of the largest VIX trades we’ve seen in a while and an interesting way to put on a tail-risk hedge,” Lillian Seidman, an options strategist at Miller Tabak, said in an interview. “This is a play on the VIX shooting through its high not seen for the last couple of years.”
The VIX, an options-based measure of the price to protect against losses in the Standard & Poor’s 500 Index (SPX), soared 26 percent to 17.82 last week, while the benchmark equity gauge fell 2 percent for the biggest drop in seven weeks on concern that the standoff in the Crimea region between Ukraine and Russia could worsen. Almost $1.7 trillion was erased from global equities between March 6 and the end of last week, data compiled by Bloomberg show.
Stocks rallied today after President Vladimir Putin said Russia wishes no harm to Ukraine. U.S. and European leaders condemned Russia’s push to annex Crimea and promised further sanctions as early as this week in the worst dispute since the Cold War.
The VIX, which hasn’t closed above 22 since the end of 2012, slumped 7.2 percent to 14.52 today. The gauge has fallen about 19 percent in the past two days for the biggest slide in more than a month. The May 22 and 30 VIX calls were the most-traded options contracts across U.S. exchanges today.
“Someone’s opening a new position in these VIX options,” Fred Ruffy, a Chicago-based senior options strategist at Trade Alert LLC, said in a phone interview. “It’s a view that volatility may spike over the next couple of months.”