One options trader is betting on an end to the market's wild swings

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Options trader bets we may have seen the worst of market volatility

An optimistic jobs report is helping stocks recover from this week's brutal sell-off, and helping investors shrug off onrushing recession fears as unemployment hits a new 50-year low and payrolls rise by a better-than-expected 136,000.

As the markets breathe a collective sigh of relief, it's beginning to look like the volatility that flooded in earlier this week might be leaving as quickly as it entered. Just Thursday, the Cboe Volatility Index (VIX) spiked to 21.44 – its highest level in nearly two months – before finishing safely back in the teens.

If the index were to remain right in that sweet spot, it would certainly be welcome news for one options trader who placed a big bet on exactly that scenario playing out, as Optimize Advisors President Michael Khouw said Thursday on "Fast Money."

"The January 22 weekly options in the VIX were trading quite a lot," said Khouw, "I saw a seller of 7,500 of the 28-strike calls to buy the 16-strike puts."

As Khouw pointed out, this trader collected about 50 cents in premium per contract upon making this trade, netting about $367,000 in premium for their troubles. That gives them some extra wiggle room should the VIX not cooperate.

"While they are making a bet that [the VIX is] not going to go above that 28-strike price, it doesn't have to go below that lower 16-strike put for them to see profits," said Khouw. "In fact, essentially, what they're doing is, they will see profits if the VIX drops, but they also will see profits if it lingers in here."

In short, this trader is betting on a slow tapering off of the VIX down through that 16-strike level, rather than a sharp gap lower. For stocks, that would mean a slow grind higher through the end of the year, rather than a ripping year-end rally.

"The VIX will respond, as it did [Thursday] to movement in the S&P 500. When the S&P rises, you're going to see the VIX fall, and vice versa," said Khouw.

The VIX was sitting more than 5% lower in Friday's session.

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