A mystery trader made a massive bet that the stock market will go crazy by October
- To fund it, the investor sold 262,000 VIX puts expiring in October, with a strike price of 12.
- The trader then used those proceeds to buy a VIX 1x2 call spread, which involves buying 262,000 October contracts with a strike price of 15 and selling 524,000 October contracts with a strike price of 25.
- For reference, bullish call spreads are used when a moderate rise in the underlying asset is expected. Traders buy call options at a specific strike price while selling the same number of calls of the same asset and expiration date at a higher strike.
- In a perfect scenario, where the VIX hits but doesn't exceed 25 before October expiration, the trader would see a whopping $262 million payout.
- It is possible for the VIX to spike too much. If it increased beyond 35.2, the investor would start to lose money since they used a call spread, even though they got the direction of the trade correct.
- For context, VIX October futures are trading at 13.6, while the spot index closed at 9.62 on Thursday.
- All data is from Bloomberg and was reviewed by a person familiar with the trade.