Huge "VIX Spike" Trade Put On Through Goldman Desk

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by Tyler Durden
Wednesday, May 17, 2023 - 02:25 AM

With the debt ceiling game of chicken reaching a crescendo, and just two weeks left until the June 1 X-date, which the Treasury market has already decided is when the US will default (technically) unless a market shock forces Washington to reach a compromise, as observed by the record divergence between the May 30 and June 1 Bills...

... some in the otherwise sleepy and bizarrely complacent equity market are quietly waking up and expecting nothing less than a VIX shock in the next few weeks.

As Goldman trader John Flood writes in his daily market recap, "the street continues to get lifted on wingy VIX upside, something to be mindful of if we do get any vol shock around the debt limit" and specifically, today a Goldman institutional customer bought 50,000 x 150,000 VIX Aug 40-60 1x3 call spreads (bought 60 strike).

Here are the 60s

... and the 40s.

While there was no notable reaction in VIX options immediately after the trade was put on - tip of the hat to Goldman for not leaking - as the bank may have used the delta flow of some serious call buying in the SVXY to offset the impact of the call spread...

... about an hour later we saw some very heavy put buying which eventually ended up pushing stocks to session lows.

It is unclear if the trade is a hedge or a pure directional bet, but one thing is clear: someone is confident that the VIX will soar above in the next 3 months to cover the cost of the trade. The portfolio will make $100MM if VIX rises to around 57.5 by May 17.

Why there? Because during the 2011 debt ceiling fiasco and US debt downgrade, the VIX hit 50. Surely it can easily do that and more this time.

Elsewhere, Flood writes that in micro vol, Goldman continues to see upside interest in TMT / AI-exposed names i.e. AMD, AMZN, etc. "as the macro backdrop continues to be supportive for large cap Tech and these stocks continue to break thru technical levels."

Here JPM trader Ronald Adler agrees: "The narrative remains consistent and circular: traders are finding it harder to be optimistic about equities, but it’s similarly difficult to be pessimistic about any megacap names. The megacap names bolster the broader tape, thus frustrating bears given the market’s resilience."

Flood also note that Goldman's consumer pad was also active in Retailers around earnings this week, notably in TGT which reports tomorrow. Implied move is ~6%: "We’ve seen clients buy short dated calls / call spread collars ahead of the print. Consensus view is TGT positioning skews negative so some clients believe risk/reward is higher on a better-than-feared print given the low bar and likely cover bid."

As a bonus, here are the rest of Flood's observations, which are available daily to pro subscribers in the usual place.

  • A better than expected rebound in retail spending, but it’s certainly not getting much excitement given the data is backwards looking and not the narrative we’re hearing from companies – our US Retail Basket finished down -2.8% today (GSXURETL). The sales report was strong and arguably helps the hawkish fed narrative a bit. Retail sales increased 0.4% (mom sa) in April, reflecting an increase in auto sales (+0.4%), a surprising decline in gasoline station sales (-0.8%), and a larger than expected 0.7% increase in core retail sales (ex. autos, gasoline, and building materials). Industrial and Manufacturing production also came in much stronger than expected on both measures. Following today’s data, we boosted our Q2 GDP tracking estimate by two tenths to +2.0% (qoq ar) and our past-quarter GDP tracking estimate for Q1 by three tenths to +1.4%. Our Q2 domestic final sales growth forecast stands at +1.9%.
  •  Our desk was a 6 on 1 – 10 scale in terms of overall activity levels. Overall executed flow on our desk ended with a -510bps sell skew vs 30d avg of +123bps.  On the back of stronger econ data this morning, we saw an uptick in rates and risk off in speculative/most shorted complexes. Retail also traded very heavy (QRTEA -13%, QUOT -7.6%, SFIX -8%, ETSY -5%, EBAY -4.6%). The increase in questions on the move lower is indicative that people are running more long risk than they have been (we saw this in our PB stats last week - long buys outpaced short covers ~5 to 1, largest notional long buying in 7 weeks, though Net leverage is still running super lean in the 7% percentile on a 3-yr lookback). Today was another day of Mega Cap tech out-performance. MAGMA accounted for ~144% of the S&P move with AMZN (+2%), GOOGL (+2.6%), NVDA (+2.5%), MSFT (+75bps) continuing to benefit from somewhat of a TINA type behavior. L/Os finished -15% better for sale, driven by trims in Health Care, Staples, and Industrials. HFs finished 130bps better to buy, driven by covers in HC on the back of Arb related weakness.  
  • ARB PAIN: HZNP (-15%) was the entire focus this morning after headlines hit that the FTC expects to file a lawsuit to block Amgen’s (AMGN) ~$30 billion acquisition. Investors were questioning impact/read-thrus to the broader arb space and pharma/biotech M&A in general. Risk remains acute for now with spillover only to PFE’s $40bn acquisition of SGEN (-6%). Amgen response to FTC, “we remain committed to completing this acquisition and intend to work with the court on a schedule that would allow the transaction to close by mid-December."
  • ADRs: Tons of inbounds on the magnitude lower on weaker prints, which suggests the space is more crowded than people appreciate. SE (-18%) posted revs short of expectations. IQ (-8%) and TME (-3.5%) both underperformed despite legitimately strong prints as investors appear as though they were hoping to take profits on strength after EPS. BIDU, where we know positioning has lightened up, outperformed despite a good but not great quarter (+4%).

More in the full note available to pro subs.