Mystery Trader Bets $5 Million On VIX Exploding To 70 By September

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by Tyler Durden
Friday, May 05, 2023 - 11:33 PM

Despite reassurances from Powell and Biden that everything is probably awesome and that the banking crisis is just a short-seller thing, Bloomberg reports that one trader seems to be extremely worried about the prospect of an S&P 500 Index meltdown, entering into a massive call position in the VIX.

A huge block trade was printed on Thursday for 300,000 VIX September call options at a strike price of 60 amid intensifying concerns over the health of US regional banks and sustained monetary tightening by the Federal Reserve. The strike price is triple the current VIX level near 20.

Additionally, the trader sold a total of 100,000 September calls with a strike price of 40 (offsetting some of the cost of the calls) in a strategy commonly known as a bullish call ratio back spread strategy.

The trade cost around $4.8 million and he is far from alone as VIX Calls continue to dominate VIX Puts, with the ratio trading around its pre-COVID collapse levels...

Source: Bloomberg

We note the bet is not unprecedented since VIX (equity risk) remains notably 'low' relative to credit risk...

Source: Bloomberg

The big question is - what's his upside?

Well, he stands to lose $5 million if VIX doesn't get above 70 by September...

Source: Bloomberg

But from there the upside is unlimited (for example, a spike to 90 would create $400 million in profits.)

Is the trader betting that the uncertainty currently priced into bonds going to spread to stocks?

Source: Bloomberg

Or is the mystery man betting that the explosion in USA sovereign risk catch up to stocks soon...

Source: Bloomberg

Either way, VIX seems 'cheap' here by any means but this trader is betting on more than just a mini-event - a VIX above 70 would crisis mode... likely prompting The Fed to come to the rescue very fast (meaning taking profits on this trade will be 'exciting').