A mysterious trader who goes by the name "50 Cent" seems to have returned to the market with a big bet that volatility will shoot up in the coming months.
According to a Bloomberg report, the trader seems to have paid 50 cents each on 100,000 call options on the CBOE Volatility Index, totaling $5 million. The trader's bet indicates they expect the index will rise to 50 in May.
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Another buy at the same strike price and expiry was made on Wednesday, with 50,000 contracts bought at 51 cents apiece for $2.6 million in total, the report said.
Past Trades: The trades brought back memories of similar actions in 2017-2018 when markets lost their calm and volatility exploded, leading to a rise in the index.
According to Bloomberg, the strategy is estimated to have made nearly $200 million in total profit from the beginning of 2017 to February 2018.
Last year, however, hedging against stock-price swings with the VIX not only failed to protect from losses but created additional ones as the CBOE VIX Tail Hedge Index lost 26% versus a 19% fall from the S&P 500, as per the report.
Alon Rosin, Oppenheimer & Co.'s head of institutional equity derivatives, told Bloomberg, "What I've noticed is every time the spot vol gets to a certain level where he thinks it's a good floor, he'll jump in and take a shot thinking that just one event or one scare will give him an opportunity to monetize it.”
"This time he's using May, a little further out to give him time, versus sometimes he's been a little shorter duration.”
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