Dealers are betting big on a stock market shock

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Volatility dealers haven’t been this sure of a stock exchange shock in almost two years.

These investors buy and sell securities on the CBOE Volatility Index, or VIX, as they predict swings (or lack thereof) in the S&P 500. The VIX typically spikes when stocks decline and fall in a steadily rising demand. And right now merchants are not trusting that everything will stay close.

The cost of bets on a calm business — used either as obstacles by traders who expect lightness or as directional wagers on fewer price swings — is deeper than it has been at any time since October 2015. That’s relative to the cost of expansion.

In other words, volatility merchants have caught the restrictor plates off their bullish VIX bet and are full including the concept of a stock market blow.

This degree of certainty over developed confusion has revealed itself in the exchange-traded-fund market. That’s home to the iPad S&P 500 VIX Short Term Futures ETN, the biggest and most densely traded VIX-linked product, which absorbed a net $219 million last month. To place the inflows in context, recognize that the long-VIX instrument saw a $41 million outflow in the six weeks preceding up to July.

These modern improvements come on the heels of several high-profile bullish VIX wagers. The week before last, a secret trader made a great bet that the VIX would surge. If strong, it would yield a $262 million payout, according to a person familiar with the trade. The investor completed a bullish call spread approach using hundreds of thousands of VIX opportunities.

And then there’s the newly revealed volatility vigilante, “50 Cent.” That investor has been spending hundreds of millions of dollars to buy appearance on a VIX spike — but doing so in bite-size pieces.

VIX bullishness continues to Jeffrey Gundlach, the originator of the hedge fund DoubleLine Capital. He said last week that his firm acquired some five-month put options on the S&P 500 as the VIX sank to a career low.

“This is like free money,” said Gundlach, who is known on Wall Street as the Bond King. “We are in a seasonally weak period for stocks, but more importantly we think the VIX was really, really low. So the S&P puts are going long volatility.”

 

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