A trader paid almost $13 million to buy call options that pay off if the Chicago Board Options Exchange Volatility Index rises at least 56 percent in the next four months.
The person used a strategy known as a call spread, designed for bets that a security will trade within a certain range. About 150,000 bullish contracts on the VIX expiring in September with a strike price of 19 were bought, according to an e-mailed note from Lake Hill Capital Management LLC, which specializes in derivatives trading and research. The cost was offset by selling the same amount of Sept. 28 calls.
“They may be putting on a fresh badge of protection,” Christopher Rich, head options strategist at JonesTrading Institutional Services LLC, said in a phone interview from Chicago. “This is a big position, but for a billion dollar fund not that huge.”
Investors are turning to the VIX, an options-based measure of the price to protect against losses in the Standard & Poor’s 500 Index, amid speculation that the calm that has prevailed in equity markets for most of the last eight months is in danger of ending. Below-average economic growth and slowing corporate earnings are creating doubts that gains from the five-year bull market can hold as the Federal Reserve prepares to end its stimulus program.
Rich said the investor may be rolling over a position that is expiring this month. The transaction is profitable if the VIX rises above 19.85, from a current level of around 12. It has a maximum payoff if the volatility index jumps to 28.
The index, known as a fear gauge because it rises when stocks fall, has closed below 15 for 25 straight days. The VIX lost 8.1 percent to 11.91 today. The call spread took place at 10:16 a.m., when the index was near 12.16.
“My guess is the investor is making a play on higher volatility in the later part of the summer or early fall,” Justin Golden, a partner at Lake Hill Capital Management, said by e-mail. The New York-based hedge fund trades options on equity indexes and commodities.
A similar trade took place yesterday. An investor spent $740,000 betting that the VIX may rise as much as 54 percent within the next month. About 20,000 June 16 calls were purchased and the cost was offset by selling the same amount of June 20 calls, according to a research report from Interactive Brokers LLC.