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One trader who has been betting against the crowd on a market blowup was able to make hundreds of millions of dollars amid last week's wild market volatility, according to Macro Risk Advisors.
The Cboe Volatility Index, or VIX, is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. It's sometimes called the "fear gauge."
The VIX surged by 115.6 percent last Monday to 37.32. It rose briefly early Tuesday to over 50, the highest level since August 2015. The measure spent most of the second half of 2017 at or below 10 as hedge funds continued to bet successfully on smooth sailing for the stock market ... until last week. That's when the losing bet for this trader paid off.
"At one point, he was down $200 million, most of that permanently lost in expired option premium. At one point, '50 Cent' became '30 Cent,' scrimping on his usual VIX option purchases, unwilling to pay up for the 50 cent VIX options that were his namesake," Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, wrote in a note to clients Monday. "But in early February, when it seemed like Fiddy's fortunes could go no lower, it came: redemption."
Market participants called the trader "50 Cent" due to his or her penchant for paying a fixed 50 cents on 50,000 VIX contract call options trades. The "50 Cent" moniker is in reference to the nickname of American rapper Curtis James Jackson III.
Call options are derivatives instruments, betting on a price increase for a specific index or security.
'50 Cent' cumulative P&L since 2017
Source: Macro Risk Advisors' Pravit Chintawongvanich
"The persistent buyer of VIX call options that we have been tracking finally made money – and how! As of the Feb 9th close, we calculate that '50 Cent' is up nearly $200 million ever since we started tracking their purchases in January of last year," Chintawongvanich wrote.
The strategist said his profit and loss analysis for the trader is under the assumption he or she hasn't exited portions of the position. He also speculated the trades were not an outright bet on volatility, but protection for a long-biased portfolio.
"We will re-iterate that contrary to many sensationalistic reports, we think 50 Cent was running this strategy as a hedge rather than some kind of 'doomsday bet.' In other words, they were long risk against it," he wrote.
Bloomberg News was first to report on the Macro Risk Advisors "50 Cent" profit figures.