The Enigmatic '50 Cent' VIX Trader Is Back

A mysterious volatility trader known only as “50 Cent” appears to have returned to the market this week, making large bets on an uptick in market volatility. Here’s a look at what they've been buying and what it means.

Big Payoff

The “50 Cent” trader earned his or her nickname last year after buying a number of relatively large stakes in Cboe Volatility Index options that were typically priced in the range of 50 cents per contract.

The VIX is a measure of the amount of volatility options traders are pricing in over the month ahead. When the market was hit by extreme volatility back in February, the VIX spiked and the 50 Cent trader scored a big win. Macro Risk Advisors estimates the trader earned $183 million from those volatility bets. 

February’s sell-off triggered a huge spike in volatility driven by a cascade in inverse volatility funds such as the XIV ETN. In a nutshell, rising volatility results in these inverse volatility funds being forced to go long volatility to maintain their inverse leverage, but this phenomenon can produce a feedback loop that can drive volatility even higher in the short term. The result is a massive short-term spike in the VIX, similar to a short squeeze in stocks.

The Return

After the big score in February, the 50 Cent disappeared for several months. But a series of options buys this week are following the same pattern traders saw heading into February’s event.

On Tuesday, someone purchased 50,000 VIX call options with a strike price of 28 and an August expiration at a price of between 50 cents and 51 cents. The trade was repeated Wednesday. Altogether, the trades represent a $5-million bet that volatility will return to the market within the next two months. The VIX, which is currently sitting at around 12.30, would need to more than double and get to 28.50 for the buyer to break even.

What It Means

For the average stock trader, 50 Cent is likely betting on another volatile market sell-off like the one in February that took the S&P 500 down more than 11 percent in a matter of days. A rise in the VIX could also correspond to a major spike higher in the stock market, but the VIX has historically traded inversely with the S&P 500 80 percent of the time.

Of course, there’s no way to even confirm that the person buying volatility call options this week is the same individual who was making similar bets ahead of February’s sell-off. It could simply be a 50 Cent impersonator attempting to copy his or her winning strategy.

Traders can’t directly buy or sell the VIX itself, but the easiest way to bet on an uptick in volatility is to buy VIX funds, such as the BRCL BK IPTH S&P 500 VIX SH FTRS ETN VXX.

Related Links:

Analyst Explains The Inverse Volatility Fund Feedback Loop

What Is The VIX, And What Does It Do?