Stocks are selling off Monday, and volatility is spiking. But one trader is making a countertrend bet that volatility will be much lower by March.
In one massive bet Monday morning, this trader bought 10,000 March 11-strike puts on the VXX, the exchange-traded note that tracks the VIX, and sold an equal number of March 9-strike puts for a net cost of 47 cents. This 11/9 put spread will break even if the VXX is below 10.53 at March expiration, or about 32 percent lower.
On Monday, we are seeing the VIX pop about 10 percent, to nearly 19, but until sit can move above 22 we would expect the spikes to be smaller and short-lived, which is just what this trader is banking on.
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The VIX measures how much people are willing to pay for options on the S&P 500, and since it tends to measure how worried investors are about the market, it's often known as the "fear index."
It is rising because of uncertainty surrounding the government shutdown and debt ceiling negotiations. But as we saw in January with the fiscal cliff, as soon as a deal is reached, volatility will come crashing down. In the two days following the fiscal cliff deal, the VXX fell more than 20 percent and continued to grind lower over the next two months while the market rallied.