When the market is in the grips of a roller-coaster ride and worrisome headlines keep swirling, what can you bet on? In a volatile market, the answer for one trader is: bet on volatility.
"Where we saw a very interesting trade, and many of them, actually, was in the VIX index," said Khouw. "Specifically, I was looking at the 30/35 call spreads. Somebody paid a little over 30 cents for 26,700 of those call spreads, which could potentially be worth $5 [per contract]."
Those contracts expire Sept. 18, and are expected to appreciate in value as that date gets closer, thanks to the options market pricing in more and more volatility entering the market environment. The volatility index closed Wednesday at 22.10.
"What happens is, when you see a lot of volatility the VIX curve actually ends up in backwardation. Spot VIX will end up even higher [than the futures]," Khouw said. "So, a bet that that future rises above 30 is a bet that something pretty wild is going on in the marketplace." Will VIX futures climb above 30? It's tough to predict. However, with a few more days of wild swings in the market, they could move higher very quickly. The more likely scenario is that this trader is looking for the VIX to climb into the mid-20s over the next week of trading so they can sell these contracts at a profit.
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