On Tuesday, a notable trade occurred in the options market for the Cboe VIX Index, where an investor purchased 563 deep in-the-money puts with a 110 strike price, expiring on October 21, for $5.1 million, alongside $1.2 million worth of 130-strike puts expiring on November 18.
This unusual activity, particularly given that these options had no prior open interest, indicates a strong conviction that the VIX, which closed at 17.2, will decline. The cost of the 110-strike puts was $91 each, while the 130-strike puts were priced at $110 each, setting a breakeven point just above $19.
Analysts suggest that this trade may not be standalone; it could be part of a broader strategy to hedge against other positions, such as short calls. The recent increase in VIX options volume, coupled with low volatility in the S&P 500, suggests a disconnect in market pricing, especially with a 90% likelihood of an interest rate hike.
The gap between the VIX index and futures is also at a high, indicating potential mispricing. Some analysts propose that the buyer of these puts might be looking to exploit the price difference between VIX options and the underlying futures, indicating a complex strategy at play as traders navigate the uncertain market landscape ahead of the Fed's decision