To The Moon

Just when I thought the no-penny strategy couldn't get any more exciting, Wall Street always comes up with something new, like making $400 million for free. On May 4, as the market focused on expectations of a rate hike at the FOMC meeting and whether the halving of Westpac's share price would trigger another bank crash, one trader bought a big portfolio of VIX options: buy 3x $VIX 20230920 60.0 CALL$ sell 1x $VIX 20230920 40.0 CALL$ Simply selling 40calls and buying 60calls can be interpreted as traders shorting VIX volatility on the assumption that nothing much will happen this year and that the VIX will remain stable below 40. However, this strategy does not have a one-to-one relationship. 3x and 1x represent the trade multiple relationship. For this trader, he bought 300,000 lots of 60calls and sold 100,000 lots of 40 calls. $4.8 million more on the 60call leg. As illustrated by Bloomberg News, the payoff is calculated as follows: VIX strategy breaks even within 40, strategy loses between 40 and 70, and strategy starts to make money when VIX reaches above 70. As you can see on the vertical axis, when the VIX reaches 90, the strategy could make $400 million. What does the trader want This question should be the first thought of all people when they see the big order. Guess what the trader's attitude is about the future trend. Buy call, buy put, sell put, various spread strategies, various strike price ranges and maturities all contain the trade's idea of the price trend in a certain period of time and how to respond if the price trend and the idea are not consistent. buy 3x $VIX 20230920 60.0 CALL$ sell 1x $VIX 20230920 40.0 CALL$ For this order, if you look at the profit range, the immediate conclusion is that the trader thinks something comparable to the financial crises of March 2020 and 2008 will happen before September 20, sending VIX prices soaring above 70. It's a powerful idea. But compared with previous VIX orders, it lacks direct deterrent, because the strike price is not straightforward. There have been several impressive VIX orders in the news before. Say someone paid $5 million for a VIX call with a strike price of 50 on Feb. 17 $VIX 20230517 50.0 CALL$ "50 Cent" VIX Trader Returns as Volatility Hedging Back in Vogue For example, on October 6, 2022, someone paid $950,000 and on October 14, 2022, someone paid $4 million for a VIX call with a strike price of 150 and 100: Someone seems to be using the vix to bet on nuclear war Will VIX hit 80 in this bear market? The higher the strike price, the bigger the deal, the more imaginative it is. Behind these big orders lurks surprising risks that the average trader is unaware of, causing anxiety. The problem is, the one-legged call doesn't need the VIX to actually go to 50, 100, or 150. As long as VIX volatility is high enough, the call will double several times depending on what vega does (see chart). buy 3x $VIX 20230920 60.0 CALL$ sell 1x $VIX 20230920 40.0 CALL$ The strike price of a one-legged call can be scary. But the scary thing about this strategy is that it really needs the VIX to rise above 70 to make money. Based on the familiar $5 million bet, I personally think these strategies are probably the same people, though they certainly don't want to offend the SEC. The SEC warned short sellers on May 4th. If the next day it was revealed that someone had bought $5 million VIXcall with a strike price of $100, it would be followed to the door. That's the first level of thinking in this strategy. Good strategy, good job The second aspect of thinking comes from the first half of the income chart: no money is made or lost below 40 I believe many friends have already panicked when thinking about the first level, this strategy needs VIX price above 70 to make money, and traders to bet $4.8 million, then the S&P 500 will collapse back to 2000? But a look at the S&P 500 Volatility Index (VIX)$shows that common VIX swings are often below 40. However, the income chart shows that the strategy below 40 does not gain or lose money. In other words, if the volatility does not meet the trader's expectations until September this year, and the trader continues to move below 40, he will not lose money at all. As for VIX prices between 40 and 70 not reaching higher prices? Endure two days of losses on the good, after a few days VIX retreat still do not lose money. In other words, compared with a normal one-legged call strategy, while you can't profit from normal moves (30-40), you don't have to pay the time cost of a position that is common with a one-legged call option. I've talked about many of these extreme hedging strategies before: A strategy of betting on earnings that costs no money An Strategy that Buy Tesla Options for Free How does an insider trader not pay to short a company Maximizing Profits: How Institutions Trade Microsoft Earnings with Options These strategies without exception exchange extreme hedging for a certain profit range, because the stock increase in a certain period of time is a fixed range, with limitations. The VIX is special. It can be seen from the historical trend that the probability of VIX price reaching 40 to continue to rise is very low. Usually, when the price reaches 40, it should consider shorting. And once it hits 70, the odds of it going up are pretty good. At 90, that's $400 million. So calculate the black swan probability, and it seems like there's no better year to buy the ticket.