VIX Call volumes had exploded in recent weeks, accelerating to their highest levels since Brexit ahead of the healthcare vote, which saw VIX spike dramatically to 2017 highs.
However, in the aftermath of the pulled vote debacle, VIX collapsed at a near record pace, as did VIX Call volumes (trading at their lowest level since 2016).
The question many had was - why the sudden rush to complacency after an event that merely increases the uncertainty of Trump stimulus - the only leg left standing for any self-respecting asset-gatherer defending "Long Stocks" to his client base.
Well, Pravit Chintawongvanich, head of risk strategy at Macro Risk Advisors, may have found the answer...
A pattern of huge, near-daily trades on the VIX is turning heads in the options market.
What's most notable is that even after losing some $75 million by betting on a volatility spike, the huge options buyer known as "50 Cent" shows no signs of slowing down. "I would categorize them as someone who doesn't flinch at losing money," commented Chintawongvanich who flagged the activity in a series of research notes.
The money-losing trades in question have been purchases of call options on the CBOE volatility index. These represent bets that market volatility is set to rise, and to a lesser extent, that stocks are set to fall.
Sussing out the actions of an institutional trader based on public information about options trades can be difficult, if not impossible. But this trader made it easier by leaving a clue out in the open. "They have a very particular pattern of buying options," Chintawongvanich explained Wednesday on CNBC's "Trading Nation." "Basically they come in every day and they buy 50,000 VIX calls worth 50 cents. So in other words, they don't care too much what the strike is; they just pick the option that's worth 50 cents."
On Thursday, for example, 50,000 of the VIX 21-strike calls expiring in May were apparently purchased at a price of 49 cents. These options will expire worthless unless the VIX skyrockets 82 percent in a bit more than a month and a half, and will lose money unless the VIX closes above 21.49 on expiration (the VIX closed Thursday trading a bit below 12).
Since the multiplier on VIX options is 100, the purchase alone comes to nearly $2.5 million. In terms of the number of contracts, it was the single biggest trade of the day on any index or stock. And that wasn't all. Also on Thursday, 15,000 May VIX 20-calls were traded at 51 cents, and 10,000 May VIX 21-calls were traded at 47 cents. In total, the party that has become known as "50 Cent" after its favorite purchase price has spent about $90 million, and has already seen $55 million worth of purchased options expire worthless.
Unsurprisingly, this strategy appears to have a marked effect on the overall market for VIX options. Total VIX call open interest has risen to an all-time high thanks to 50 Cent's purchases, Chintawongvanich said.
And so we come full circle to the question of why the sudden rush to complacency among options traders following the pulled healthcare vote. Ironically, the huge bets on the VIX could end up dampening volatility.
"50 Cent becomes very well hedged in a risk-off event, and would be in a position to provide liquidity for those scrambling for a hedge," Chintawongvanich wrote.
"The presence of '50 Cent' could mean that future volatility spikes are muted."
In fact, Jake Weinig, founding partner at options-centric hedge fund Malachite Capital, commented in an email to CNBC that "the size is probably too big"; the very enormity of the trade "almost makes it a self-fulfilling prophecy that it won't pan out."
So once again the illiquidity of the options-tail-wagging-the-market-dog equity market is exposed (just as it was with Catalyst's levered gamma positions that drive stocks up for an unprecedented winning streak - with no rational economic reasoning).