A trader bets that the VIX index will triple in the next three months

(Bloomberg) – Warmer-than-expected private hiring data has woken up Wall Street’s leading fear gauge after weeks of calm in volatility markets. A trader is betting that this is just the start of a new wave of turbulence.

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

The trader bought around 83,000 call contracts expiring on October 18 in a single block, paying around $4.5 million for them, while simultaneously selling around 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 short-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 VIX option volatility. “This position is usually closed well before expiration because once it gets closer to expiration, the October 45 call decline begins to set in.”

While the trade is by no means huge – the investor spent a net amount of around $665,000 – it does highlight a bet that market turmoil will reemerge by fall after volatility returns. to a state of pre-Covid calm earlier this summer. The VIX index fell to 12.91 on June 22, its lowest level since January 2020. On Thursday, it jumped 2 points to 16.16.

Stocks fell sharply on Thursday after the U.S. labor market showed further signs of resilience, as private hiring increased, the pace of layoffs slowed and jobless claims remained relatively weak. This fueled speculation that the Federal Reserve will become more aggressive in its fight against inflation.

“While we have seen the market rise in 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 Fed tightening are still being felt in the economy and there could be a risk that inflation will remain well above the 2% target.”

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

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