By Saqib Iqbal Ahmed
NEW YORK (Reuters) - A string of hefty bets on a doubling of Wall Street's best known volatility index is raising eyebrows in the U.S. equity options markets, though analysts say they are probably not wagers on a market crash.
Some 100,000 January call options on the Cboe Volatility Index changed hands on Friday, with a strike price of 27. That is nearly twice the current level of the VIX, which has fallen close to a two-month low of 13.69 following a rally that has seen the S&P 500 advance to within 2% of its year high.
Similarly large positions in January VIX options were opened on Wednesday and Thursday. In all, the trader or traders paid about $37 million to buy more than 500,000 VIX January calls.
Past periods when the VIX has doubled within the space of two months have been marked by intense stock market selloffs, such as the COVID-19 market crash of March 2020 and the selloff in March 2018.
The recent large trades, however, are more likely hedges on a portfolio of stocks, rather than wagers on a massive equity selloff, options strategists said.
"By definition this is a disaster hedge but I don't think it's someone who is expecting the VIX to double ... there are other trades to do if you are expecting the VIX to explode," Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group. "This could even be a big macro fund adding long exposure and in order to add long exposure they need to have more of a hedge on," Murphy said.
The trades are unusually large and make up about 5% of this month's overall trading volume in VIX options, according to Trade Alert data.
The recent surge in stock prices on growing investor conviction that the Federal Reserve is done hiking interest rates has crushed volatility levels, making the price of options hedges relatively attractive. "Realized volatility has come crashing in and the market has been one way ... on paper, these calls look fantastic," said Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald. Tym cautioned that with volatility spikes few and far between, these types of positions have done poorly this year.