Option Whale Exits VIX Call Position with $12 Million Gain. Will the Fear Gauge Drop Next?
The $CBOE Volatility S&P 500 Index (.VIX.US)$, often referred to as Wall Street's "fear gauge," experienced another significant spike on Tuesday, triggered by a dramatic drop in $NVIDIA (NVDA.US)$'s shares and troubling economic data from the Institute for Supply Management (ISM). Will the market regain confidence rapidly like it did a month ago?
The Vix index spiked 38% higher on Tuesday, marking the 25th largest one-day percentage increase in the index's history, which dates back to 1990. The spike came after a brutal trading session where Nvidia plummeted over 9%, contributing to a broader pullback in semiconductor stocks.
Earlier this month, a few analysts had cautioned that a large spike in the VIX often precedes further market turbulence. The cluster theory claims that volatility has a tendency to cluster, meaning significant fluctuations often lead to prolonged aftershocks.
"August 5 was a major earthquake, and after major earthquakes, aftershocks usually follow—we expect them to occur frequently until the U.S. elections," said Jay Woods, Chief Global Strategist at Freedom Capital Markets
Unusual option activity
This rise in VIX might be concerning, given the drop in the market. However, data from the options analytics platform Unusual Whales revealed that recently purchased VIX call positions were liquidated following the VIX's spike on Tuesday, possibly indicating renewed confidence in a short-term reversal lower.
According to Bloomberg, these positions were originally acquired last Friday by an options trader, or traders, who spent upwards of $9 million on VIX call spreads expiring in September. The trade involved approximately 350,000 contracts of VIX 22/30 call spreads, each changing hands for about $0.25. This move signaled an expectation of the VIX Index rising above 22 but capping at 30. The swift liquidation of these positions after the spike suggests that investors might be growing more optimistic about imminent market stability.
According to Bloomberg's story, it looks like Friday's buyer reversed course and sold the stake, but it's difficult to tell for sure. Regardless, the possible earnings amount to approximately $12.25 million.
The trade is likely “hedging the slew of events the next month including payrolls, the first debate, CPI and a few central bank meetings,” said Daniel Kirsch, head of options at Piper Sandler.
Mean Reversion of the VIX
One distinguishing characteristic of the VIX, unlike most stocks or indices, is its tendency for mean reversion rather than prolonged trending movements. The VIX often experiences sudden spikes followed by rapid declines, with the majority of its fluctuations occurring within a range of 10 to 25. This behavior underscores the mean-reverting nature of the VIX.
Historical performance shows that, volatility, including the VIX index, maintains a long-term equilibrium level. When market turmoil causes the VIX to deviate significantly from this stable value, it tends to revert quickly, moving back toward its historical mean. This phenomenon makes shorting the VIX after a large spike a compelling strategy.
When the VIX experiences a sudden surge, it often reflects a peak in market fear and uncertainty. Historically, such spikes are followed by a period of normalization as market conditions stabilize. This mean-reverting behavior provides an opportunity for traders to capitalize on the decline in volatility that typically follows a spike.
Shorting the VIX through instruments like the ETF aims to provide a return when the Vix goes down or by selling call options. These strategies allow traders to profit from the anticipated downturn in the VIX as it moves back towards its long-term average. However, it is essential to remain mindful that while mean reversion is a well-documented characteristic of the VIX, it is based on historical observations and may evolve over a long period of time.
In conclusion, the mean-reverting nature of the VIX offers a strategic advantage for traders looking to short volatility after a significant spike.
Source: Bloomberg, X.com
Disclaimer: Options trading entails significant risk and is not appropriate for all customers. It is important that investors read Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Opening new options positions close to or on their expiration date comes with substantial risk of losses for reasons that include potential volatility of the underlying security and limited time to expiration. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including i potential for losses that may exceed the original investment amount. Supporting documentation for any claims, if applicable, will be furnished upon request.
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Jarrod Humphries : these NVDA calls are keeping us afloat over September, yes, but what about Warren just losing $266 million in his ULTA buy lol, I'd fire that "FAILURE" advisor pronto...what he should have done is look into beauty suply company RAY... would have gotten A LOT more shares for his money because of the price... and would have actually seen a substantial return for his last major buy/sell of August... I guess being an Advisor for Warren Buffet looks good on a resume anyways...
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Gilley : yeah inside info and sold made the money and instantly stops whats the odds right probably Nancy Pelosi
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Laine Ford : no comment