VIX index could stage a 175% comeback to $50 by May

The CBOE Volatility Index (VIX) plunged below $20 even after the strong US economic numbers. It dropped to $18 as the yield curve inverted to the lowest point in decades. The closely-watched index has plunged by over 47% from its highest point in September last year.

50 Cent bets VIX could surge

The VIX index is one of the most popular financial instruments in Wall Street. Developed by CBOE and Goldman Sachs, the index is seen as the most accurate gauges of volatility in the market. In most periods, it has an inverse relationship with stocks and cryptocurrencies.

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Data in the options markets shows that an options trader known as 50 Cent has placed bets that the VIX index will jump to $50 in the coming months. If that is accurate, it means that the index needs to surge by over 175% from the current level.

50 Cent’s trade is relatively simple. He paid 50 cents for 100,000 call contracts, which are estimated to be worth about $50 million. The trader then placed another trade worth about $2.6 million on Wednesday. Therefore, if he is accurate, the trader will net millions of dollars by May when the options expire.

Yield curve has inverted

The main catalyst for a potential jump in volatility is the expected recession. As shown below, the yield curve has inverted to the lowest point since the 1980s. This means that short-term bonds and notes are yielding better than longer-dated ones. 

In most periods, an inverted yield curve usually happens ahead of a recession. Because of the depth of this inversion, a recession could be more severe. Recent USA news show that the economy was doing well, which could push the Fed to tighten more.

Another reason to bet on volatility is that it seems retail traders are back. Retail inflows into American funds have increased in the past few months. At the same time, cryptocurrency prices have surged, with Bitcoin eying $25,000. 

However, the trade has technical risks. On the chart below, we see that the VIX index formed a death cross on November 29. In price action analysis, this cross is usually a bearish sign. It has also crossed key support levels at $19.15 and $18.49, the lowest points in April and August 2022. Therefore, there is a likelihood that the index will continue retreating in the near term.