VIX Options Trader Just Made $232,650,000


During our last unusual options trading alert, we mentioned how a mysterious VIX options call buyer made a staggering $5,225,000 bet on a sharp increase in volatility by buying 137,500 call options with only 27 days until expiration on January 16th, 2018.

We noted that, if the VIX did not trade above 19.38 in 27 calendar trading days from the time the trade was made, the $5,225,000 trade would be totally worthless.

Monday’s trading action changed all of that. US stocks sold off dramatically on Monday, February 5th, with the S&P 500, Dow Jones, and Nasdaq all trading down below 5% at multiple times during the day. As a result, volatility absolutely exploded.

The CBOE VIX Index closed up 155.60%


On January 17th, 2018, 137,500 call options were purchased in two large blocks:

50,000 calls were purchased for $0.36 on January 16th, 2018 at 10:5 AM EST.

Shortly after that, 87,500 calls were purchased for $0.40 at 12:58 pm EST.

1/16/18 12:58 14 FEB 18 19 C 87,500 0.40 CBOE
1/16/18 10:50 14 FEB 18 19 C 50,000 0.36 CBOE

All together, this equated to an average price of $0.38 per option (which is $38.00 per option, since the VIX option multiplier is 100). 137,500 options at $38 per option equals a whopping $5,225,000 in option premium.

At the time this trade was placed, the $5 million bucks in option premium seemed like a large amount of money to risk on a single trade by our standards. However, now that those same 19 strike price calls are now worth $10.30 and traded as high as $17.30… the original $5 million investment looks like peanuts. As of the highest traded price on Monday, this position yielded a profit of $232,650,000 at its peak.

Someone’s Trading Account saw a Gain of $232,650,000

Regardless of who placed this trade, someone out there has a trading account that gained a quarter of a billion dollars in 19 days.

Most likely, an institutional investor purchased these options as a hedge to a large long-stock portfolio, but there is no definitive way to tell.

It could have very well been Nassim Taleb betting that the market was underestimating a black-swan type of event. Taleb was thrusted into the spotlight after accurately predicting the chaotic “flash crash” on August 24th, 2015. He claimed his fund made over $1 billion during the market meltdown, although this was never independently verified.

Speculation or Hedging by Trading Vix Options

Unfortunately, there is absolutely no way to tell who purchased these 137,500 VIX call options, and there’s no way to ascertain if it was a hedge or a speculative trade.

Our gut instincts tell us that it was most likely an institutional portfolio manager needing to reduce beta in their portfolio. Often times, hedge funds, pension funds, and other financial asset managers have strict guidelines for net long exposure.

If a particular fund manager’s overall long exposure or sensitivity to volatility, also known as beta, rises or passes a certain level, they are often mandated by investor prospectuses and guidlines to take action and hedge their positions.

Unloading millions of shares of stock is both expensive, time consuming, and often very inefficient. Therefore, it’s common for fund managers to purchase volatility itself as a hedge against a large basket of stocks. This type of hedging can be in the form of VIX futures or VIX options; in this case, if this trade was indeed a hedge, the mysterious trader elected to use VIX options.

Remember, although this gain of $232,650,000 seems really impressive, if the call options were purchased as a hedge, then it is very likely that the person who purchased these options lost a whole lot more than $230 milliton during Monday’s trading. The gain from the VIX options likely offset some of the losses from this traders actual core position, but it most likely did not offset the losses entirely.

If the VIX Options were a Speculative Trade

If this is the case, then someone out there just made damn near a quarter of a billion dollars off of an initial $5 million investment in just 19 calendar days. That, ladies and gentlemen, is a very impressive ROI, especially given only 13 market days passed.

VIX Futures Are Now the Best Performing Asset of 2018

As of Monday night, VIX futures for March delivery settled up over 100%.

S&P 500 VIX (Mar ’18)


Oats (Mar ’18)


Lumber (Mar ’18)


Cocoa (Mar ’18)


Hard Red Wheat (Mar ’18)


Platinum (Apr ’18)


Lean Hogs (Feb ’18)


Mexican Peso (Mar ’18)


Orange Juice (Mar ’18)


Rough Rice (Mar ’18)
source: barchart

Final Thoughts

If anything, this trade should serve as a quintessential example of the power of options trading. By no means does every options trade result in a 4,352.63% gain in only 19 days.

With that said, however, options are just about the only type of financial instrument that can produce that kind of return in that kind of timeframe.

Even futures traders who were long VIX futures would not have made that much. These options exploded; there’s no question about it. Moreover, this should be a lesson that underscores the extreme risks with being short volatility.

For whatever reason, investors unloaded a lot of their long stock positions on Monday causing prices to absolutely plummet and volatility to absolutely soar. Those who were short volatility on Monday suffered astronomical losses. That’s why Monday, February 5th, should be an ominous reminder of the danger of selling naked options or selling volatility outright.

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