Despite rally, traders bet on more volatility

Options Action: The fear trade
Options Action: The fear trade   

Volatility surged to a four-month high this week as the Greece debt crisis weighed on investors. And even as the market found its footing on Tuesday, some traders are still betting that fear is here to stay.

On Monday, when the S&P 500 saw its worst one-day selloff of the year, volume in the CBOE Volatility Index, commonly referred to as the VIX, ran two times its daily average. And one trader bet nearly $1 million that the VIX would stay above current levels through for at least the next couple of weeks. Specifically, that trader purchased 16,000 of the July 18/22 call spreads for 60 cents each. Since each options accounts for 100 shares, in this particular strategy the trader spent $960,000 that the VIX, or "fear index," will remain above $18.60 through July expiration. In early Tuesday trading, the VIX was at $18.29.

"I think this is a very favorable way for those who are wondering if there is still an opportunity for them to hedge," options expert and CNBC Contributor Mike Khouw said Monday on CNBC's "Fast Money." Khouw noted that options prices in the VIX are relatively high, and using a call spread is a great way to offset the cost.

Super spikes in the VIX tend to correspond with a selloff in the stock market, and much like the S&P 500, the VIX has traded in a relatively tight range this year, hitting roughly $12 on the low end and $16 on the high end.

The S&P 500 was half a percent higher during Tuesday's trading session.

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  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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