A trader ordered 50,000 50 VIX call options ahead of the Fed meeting, the last time the VIX index reached this level was during the pandemic.
As investors re-weigh when the Fed will start cutting interest rates and the S&P 500 retreats from all-time highs, traders are betting heavily on volatility.
An hour after the U.S. stock market opened on Wednesday, a trader appeared to be **50,000 call optionsBet on the VIX (the CBOE volatility index, known as Wall Street's "fear index.")It could rise to 50 by AprilThe last time the VIX index reached that level was during the pandemic. The cost of this bet is relatively low, at 20 cents per copy, and thanks to the hedging, buyers will eventually be able to profit from much smaller fluctuations in the market.
Prior to this, there was a series of similar transactions last week and Tuesday, making the following:The total volume of VIX calls with strikes of 50 and 55 reached 250,000, worth nearly $4.4 million.
With the VIX hovering around 14, this level means that there is little panic in the market, therefore,Trading on the above **vix call options can be a cheap way to bet on rising volatility。According to VVIX, a measure of the implied volatility of VIX options, the cost of VIX options remains at pre-pandemic levels, and even a slight push higher in the S&P 500 could cause the value of VIX call options to soar, resulting in profits for trading.
Rocky Fishman, founder of derivatives analyst firm Asym 500, said: "Geopolitical, US** and tail risks driven by interest rate volatility all make it easy to think of a scenario where the VIX moves significantly higher in the near term. The VIX index is currently low and quiet, significantly depressing VIX calls**.
Wednesday's trade consisted of multiple parts, and traders are likely to simultaneously** a 16-strike VIX put option and sell a 16-strike VIX call contract to hedge the directional risk that comes with the trade.
Policymakers on Wednesday dismissed the idea that the Federal Reserve would cut interest rates immediately, while geopolitical frictions such as the Russia-Ukraine conflict, the Israel-Hamas war, and economic uncertainty also made investors nervous.
The S&P 500 index on Wednesday**16%, the biggest one-day drop since September 21 last year. The reason is that the Fed kept interest rates unchanged and said that "it is not appropriate to expect a rate cut until there is greater confidence that inflation is continuing to move towards 2%." ”
Data compiled by Barclays shows that the options market expects the S&P 500 to appear 076% up and down, down from 0 percent associated with last year's Federal Open Market Committee (FOMC) meeting86% average actual fluctuation.
With the S&P 500 still a few points away from its all-time high, traders' interest in protection has been low. The S&P 500's bearish-bullish ratio hovers around 077, about 10% below the 10-year average, while a measure of how much the index's constituents are expected to move in tandem over the next three months hovers at 02, the lowest level since January 2018.
Note: The put-call ratio refers to the ratio of the volume of the corresponding put option contract to the call option contract of a certain undertaking. According to Macmillan's theory, this ratio reflects a volatile change in market sentiment. When a certain extreme value is reached, there is the possibility of reversal of the extreme.