Trader Sells $18 Million VIX Calls in Day’s Biggest Options Bet

Jan 27, 2014 5:49 pm ET

Jan. 27 (Bloomberg) -- An investor sold about $18 million in calls on the Chicago Board Options Exchange Volatility Index, a strategy that will be profitable as long as the VIX doesn’t keep extending last week’s surge.

The trade included the sale of 250,000 February 22 calls for about 70 cents each, according to data compiled by Bloomberg and Trade Alert LLC. It happened after the VIX reached an intraday high of 18.99 around 12:20 p.m. New York time. The investor will keep the proceeds if the VIX stays below 22 and the calls expire worthless.

“It’s impressive in size and it’s impressive in timing,” Henry Schwartz, president of Trade Alert, a New York-based provider of options-market data, said in a phone interview. “Whether it’s an outright bet against the VIX rising or hedge against existing positions is hard to say. It’s a large account for sure.”

Stock-market volatility soared last week after data signaling a possible contraction in China’s factory output and a devaluation of Argentina’s peso shook investor confidence. Emerging-market equities have tumbled since the Federal Reserve signaled in May that it could start scaling back bond purchases that boosted demand for higher-yielding assets.

The VIX jumped 46 percent to 18.14 last week, the biggest increase since May 2010. The measure, which tracks the cost of options on the Standard & Poor’s 500 Index, slipped 4 percent to 17.42 today.

Huge Trade

The bearish volatility bet was the biggest single block of options to change hands on U.S. exchanges, according to data compiled by Bloomberg. Before today, the open interest in the February 22 call contract was about 181,000.

“The trade was huge,” Mark Caffray, who brokers contracts on the VIX for clients at Chicago-based PTR Inc., said in an interview. “To say the least, this trade caught dealers off guard.”

There were a record 8.4 million calls outstanding on the VIX before expiration last week, more than twice the level in June, according to data compiled by Bloomberg. Calls on the VIX, a gauge used by investors as insurance against losses because it climbs when equities fall, outnumber puts by the most since 2010 with a ratio of more than 3-to-1.

--Editors: Lynn Thomasson, Jeremy Herron