One Trader Bets the VIX Index Will Triple in Next Three Months

(Bloomberg) — Hotter-than-expected private hiring data has woken up Wall Street’s chief fear gauge after weeks of quiet in volatility markets. One trader is betting it’s just the start of a new round of turbulence.

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An investor placed a bet on Thursday morning that the Cboe Volatility Index, known as the VIX, will soar above 45 by mid-October, a level that’s more than triple the gauge’s Wednesday close. The VIX hasn’t been that high since the aftermath of the Covid-19 pandemic market crash in April 2020.

The trader bought about 83,000 call contracts expiring on Oct. 18 in a single block trade, paying about $4.5 million for them, while simultaneously selling about 27,700 VIX calls with a strike price of 27 and the same expiration date to offset the cost.

“This is a classic VIX tail hedge where the investor is looking to capitalize on a near-term spike in VIX and VVIX,” said Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, referring to the VIX and another gauge of expected volatility in VIX options. “This position is typically closed well before expiration because once it’s closer to expiration, decay of the October 45 calls begins to set in.”

While the trade is by no means huge — the investor spent a net of about $665,000 — it highlights a bet that market turbulence will resurface by the fall after volatility returned to a pre-Covid state of calm earlier this summer. The VIX Index fell to 12.91 on June 22, the lowest level since January 2020. On Thursday it jumped 2 points to 16.16.

Stocks fell sharply on Thursday after the US labor market showed fresh signs of resilience, as private hiring surged, the pace of layoffs slowed and filings for unemployment benefits stayed relatively low. That added fuel to speculation that the Federal Reserve will become more aggressive in its battle against inflation.

“While we have seen the market get pulled higher through the first half of 2023, this may not be sustainable,” said Michael Beth, director of equity and derivatives trading at WallachBeth Capital LLC. “The full effects of the Fed tightening are still working their way through the economy and there could be risk that inflation is sticky significantly above the 2% target.”

The VIX 45 calls with an Oct. 18 expiration were among the six most-traded contracts on US exchanges as of 11 a.m. Thursday.