Bizarre volatility bet in the options pits is a head scratcher ahead of Fed rate decision — SkimNews
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- A mystery trader placed Tuesday's largest single VIX options trade, buying 563 110-strike puts expiring Oct. 21 for $5.1 million and 130-strike puts expiring Nov. 18 for $1.2 million — the latter coinciding with the scheduled release of next month's FOMC minutes.
- The deep-in-the-money puts had no open interest before Tuesday and were struck far below the VIX's 17.2 close, with breakeven levels near $19, suggesting high-conviction bets that volatility will decline over the next two months.
- Noel Smith, founder and CIO of Convex Asset Management, suggested the buyer may already be short VIX calls and using the puts to hedge 'wingy risk' on a larger book.
- Brent Kochuba of SpotGamma offered a second reading: the trader may be running a spread — pairing the deep ITM puts against long calls and a long futures position to lock in the price differential as long as VIX stays under 110.
- S&P 500 options are pricing in just a 0.8% move for Wednesday's expiry — unusually low for a Fed meeting — while the VIX has held above 16 and options volume has run above average for nearly a week.
- The gap between the VIX index and its futures is near its widest level since June, and combined with the sub-1% realized S&P 500 swings over five days, points to a split between market-makers and big traders on how to price near-term outcomes despite the bond market pricing a 90% rate-hike probability.
Why it matters: Options veterans are split on what the trade actually means, but the gap it highlights is concrete: S&P 500 options imply a 0.8% move at Wednesday's Fed-meeting expiry while the VIX sits above 16, suggesting the volatility gauge may be overpriced relative to where equity options are pricing the session. Whoever placed the $6 million bet is making a leveraged wager that this disconnect resolves downward.
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