The S&P 500 is on track to post its first four-day winning streak since January, but some options traders are bracing themselves for a potential surge in volatility.
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In a trade Friday that raised eyebrows for its sheer size, one options trader predicted that the , or VIX, could see a super spike by June. Specifically, the trader sold 181,000 VIX June 17-strike calls and sold out of an existing position in 84,000 June 20-strike calls and used a portion of those proceeds to finance the purchase of 362,000 VIX June 23-strike calls.
"This trade was very interesting," said RiskReversal.com founder Dan Nathan. "It's either playing for no movement, or massive movement."
Because the trader sold calls that were more expensive than the ones that were bought, the total cost of the trade was relatively low. In fact, with the premium collected, this particular trade would be profitable if the VIX languished at low levels. But in order for it to pay off, the trader would need to see a huge move in the VIX, making this an all or nothing event.
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"This is not a hedge for a mild move. This is crash protection," said Mike Khouw, options expert and a CNBC contributor. "This trade pays off if a bomb goes off."
Betting on fear has been a losing trade, with the VIX falling to its lowest level of the year on Friday, this despite concerns over a potentially rocky earnings season and a Fed rate hike that could come later this year.
And past earnings seasons have proved difficult for stocks. "When you look back over the last year, the first month of the first quarter, which also tends to correspond with earnings season, we've seen some downward volatility. Declines on average of 5 percent," added Nathan. "Investors get bulled up into a quarter-end."
The technicals also speak to the threat of volatility. "Equilibrium is a part of the market, but we know that it doesn't last. We've been very quiet and something has to give," said Carter Worth, chief market technician at Cornerstone Macro. "There should be a pickup in some sort of directional move rather than this sideways move."
