This is a Guest Blog from CNBC Contributor Brian Stutland.
Since the beginning of 2013, the CBOE Volatility Index (the VIX) has fallen over 30 percent, and is now at lows not seen since 2007. But one trader believes that this could soon change.
On Thursday, someone bought 100,000 VIX February 16-strike calls for $0.55 each. This is a $5.5 million bet that the VIX will settle above 16.55 (30 percent higher) 13 trading days from now. The trade occurred just before the VIX spiked from about 12.60 to a high of 13.50, before reversing again to close at 12.75.
The VIX is a mean-reverting product, and this is a bet that it will revert off of its current, exceptionally low level, and back towards its long term average, which is roughly the 15-20 range. However, there is no guarantee that the VIX will move back to these levels anytime soon.
For instance, during 2005 and 2006, the VIX rarely popped above 15, preferring to stay between 10 and 15, since the market was bullish and realized volatility was low. Not until there was major underpinning credit risk in the market during the financial crisis did the VIX take off, and it has since spent much of its time above 20. As the ramifications of the U.S. financial crisis fade and European debt crisis is resolved, the VIX could settle into its pre-crisis range of 10-15.