Some Traders Bet Wall Street's Fear Gauge Is Set for 260% Jump

This activity comes on the heels of several comparable transactions last week and on Tuesday. Cumulatively, these deals involve the acquisition of approximately 250,000 VIX call options with strike prices of 50 and 55. It appears that the trader or traders involved have invested nearly $4.4 million in these speculative positions.

With the VIX Index currently around 14, indicating a relatively calm market atmosphere, the trade might represent an economical gamble on escalating market volatility amidst persistent concerns.

“Tail risks driven by geopolitics, US elections, and interest rate volatility all make it easy to envision scenarios in which the VIX is much higher in the near term, yet a low and un-volatile VIX has driven down the prices of VIX call options considerably,” said Rocky Fishman, founder of derivatives analytics firm Asym 500.

The Barbell strategy is an investment approach that involves placing a significant portion of a portfolio in two extreme types of investments: one with very low risk and the other with high risk, with little or nothing in between. This strategy gets its name because, like a barbell, it is heavily weighted at two ends but light in the middle.

By buying OTM VIX call options, the investor is hedging against tail risk, as previously discussed. The low-cost of these options makes them an attractive insurance policy against severe market downturns. The expectation is that, should a tail event occur, the gains from the OTM VIX options will offset losses from the lower-risk investments or from other parts of the investor's portfolio exposed to the equity markets.

As the S&P 500 hovers just below its record peak, there's been a notable disinterest among traders in securing protection against declines. The put-to-call ratio, an indicator of market sentiment, is lingering around 0.77, which is roughly 10% beneath its decade-long average. Simultaneously, a metric assessing the expected collective movement of S&P 500 stocks over the upcoming three months is sitting at 0.2, marking its lowest point since January 2018.