An investor bought $5.12 million in call options that will be profitable if the Chicago Board Options Exchange Volatility Index jumps at least 50% in the next four months.
The trader purchased 40,000 April calls on the VIX with a strike price of 22 for $1.28 each, according to Trade Alert LLC. The bullish volatility bet was the biggest single block of options to change hands on U.S. exchanges, the research firm said. The VIX slipped 0.9% to 15.28 as of 2:55 p.m. in New York.
Investors are positioning for a possible jump in volatility with stocks poised for the biggest annual advance since 2003 after the Federal Reserve refrained from reducing monthly bond purchases. The central bank may begin reducing its $85 billion of monthly bond purchases at its Dec. 17-18 meeting, according to 34% of economists surveyed Dec. 6 by Bloomberg, up from 17% in a Nov. 8 poll.
“Customers continue to hedge their stock-market risk by buying upside calls in the VIX,” Mark Caffray, who brokers contracts on the index for clients at Chicago-based PTR Inc., said in an interview. “There have been very aggressive customer buyers of VIX calls in March 23, April 24, and today April 22 call strikes,” he said. “We do not expect this activity to subside until a Fed decision on tapering.”
The S&P 500 has surged 25% in 2013. Three rounds of monetary stimulus from the central bank have helped drive the equity index up more than 160% from a 12-year low in 2009.
The VIX, calculated using S&P 500 options expiring over the next 30 days, is often used as a hedge for stock investors because it moves in opposite direction of the S&P 500 about 80% of the time.
The calls were purchased at 11:04 a.m. in New York, when the VIX was about 15.5, data compiled by Bloomberg show. Including the cost of the trade, the gauge would have to reach 23.28 before the April 16 expiration to be profitable. The transaction accounted for about 9% of VIX trading, data compiled by Bloomberg show.
The VIX has climbed 26% since mid-November on concern over the timing of the Fed’s stimulus cuts and the outcome of budget negotiations. It rose for eight consecutive days through Dec. 5, a record-tying streak.
The recent advance in volatility comes during one of the calmest equity markets this decade as continued Fed stimulus helped suppress risk perception. The VIX has averaged about 14.2 a day this year, the lowest reading since 2006, data compiled by Bloomberg show. The gauge has closed below its historic mean of 20.20 on all but two days of the year.
Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.