Wednesday, 20 November 2013

VIX Trader Betting $13 Million on 88% Jump in Fear Gauge

By Nikolaj Gammeltoft - Nov 19, 2013 12:51 PM PT

An investor bought $13 million in call options on the Chicago Board Options Exchange Volatility Index, betting the gauge will rally at least 88 percent in the next four months.
About 100,000 VIX March calls were purchased with a strike price of 23 for about $1.30 each, according to Trade Alert LLC. The contracts were among the five most-traded on U.S. options exchanges today, based on data compiled by Bloomberg.
Chicago Board Options Exchange A U.S. flag is displayed as traders work on the floor of the Chicago Board Options Exchange (CBOE) in Chicago. Photographer: Tim Boyle/Bloomberg
Nov. 19 (Bloomberg) -- Laurence D. Fink, chief executive officer of BlackRock Inc., talks about investment strategy. Fink, speaking with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "Market Makers," also discusses regulatory oversight of the financial markets and the Washington political environment. Bloomberg's Al Hunt also speaks. (Source: Bloomberg)
In another transaction, a person spent $5.1 million in a bet that the Standard & Poor’s 500 Index will rise more than 10 percent in the next three months. The trade involved buying about 31,000 February calls for about $1.65 per contract with an exercise price of 1,975 on the U.S. equity benchmark, according to Trade Alert.
“The S&P 500 (SPX) trade looks like a melt-up trade and the VIX trade is the melt-down trade,” Justin Golden, a partner at Lake Hill Capital Management LLC, said in an e-mail. The New York-based hedge fund trades options on equity indexes and commodities. “Either way, in order for either of these to pay off you need significant movement in some direction.”
The two trades -- one that makes money with higher volatility, the other profiting with equity gains -- show seemingly opposing wagers on the direction of the stock market as investors gauge the prospect of continued monetary stimulus after a four-yearbull market. The transactions may be used to speculate on the direction of the VIX (VIX) or S&P 500, or to hedge swings in other investments.

‘More Hopeful’

The S&P 500 is up 25 percent this year, putting it on track for the biggest annual gain since 2003, as the Federal Reservemaintained bond purchases to spur economic growth and corporate earnings topped analysts’ estimates. Investors may see political turmoil over the next three months as Congress’s self-imposed deadline to agree on a fiscal 2014 budget comes next month and the law now funding the government expires Jan. 15.
The S&P 500 fell 0.1 percent to 1,789.25 at 3:32 p.m. in New York. The VIX, which moves in opposite direction of the equity gauge about 80 percent of the time, gained 2.1 percent to 13.38. The VIX was about 12.9 when the calls were purchased this morning.

‘Real Money’

It’s possible that the trades were done by the same firm, according to Neil Azous of Rareview Macro LLC.
“The less obvious conclusion is that a very large real money investor purchased both equity and volatility upside, based on the argument that we may see higher U.S. equities and higher volatility in 2014,” Azous, founder of the Stamford, Connecticut-based advisory and research firm, said in an interview. “That could happen as we exit the current monetary environment, while world economic growth continues to improve, putting upward pressure on bond yields and stress on emerging markets.”
The Organization for Economic Cooperation and Development cut its global growth forecasts for this year and next as emerging-market economies including India and Brazil cool. The world economy will probably expand 2.7 percent this year and 3.6 percent next year, instead of the 3.1 percent and and 4 percent predicted in May, the Paris-based OECD said today.
Another large VIX trade today suggests an investor is wagering the volatility gauge may climb above 21 in the next three months. In a strategy known as a call spread, about 100,000 VIX February 20 calls were bought and the same number of February 28 calls were sold, according to New York-based Trade Alert.
The trade, which cost $10.4 million, will profit if the volatility gauge rises above 21.04 by the expiration, data compiled by Bloomberg show. It has a maximum payoff if the VIX jumps 114 percent to 28 from yesterday’s close.
To contact the reporter on this story: Nikolaj Gammeltoft in New York at
To contact the editor responsible for this story: Lynn Thomasson at