A mysterious $6 million options trade involving the Cboe VIX Index has caught attention in the days leading up to the Federal Reserve’s Wednesday rate decision. Around 10 a.m. Chicago time, an unidentified trader acquired 563 deep in-the-money puts with an 110-strike expiring on Oct. 21 for $5.1 million, alongside $1.2 million worth of 130-strike puts expiring on Nov. 18, which coincides with the FOMC minutes release.
The VIX closed Tuesday at 17.2, meaning these strikes are significantly deep in the money. Notably, there was no prior open interest in these specific contracts before Tuesday’s activity, and the premium paid exceeded that of any other single options trade that day.
Deep in-the-money puts typically carry a high delta, indicating a strong probability of expiring with value. On the surface, the move signals conviction that volatility will decline over the next two months. At $91 per 110-strike contract and $110 per 130-strike contract, the trade’s breakeven point sits slightly above $19.
However, market participants doubt this was an isolated position. Noel Smith, founder and chief investment officer of Convex Asset Management, suggested the buyer may be managing risk from other holdings, such as short call positions. “People buy these tiny little VIX calls for 10 cents because if they go to 20 they can say they made a hundred,” Smith explained. “But the seller of those calls… have this wingy risk on the book they need to manage.”
The trade highlights a broader disagreement among market-makers and large traders regarding how to price near-term outcomes. While bond markets price in a 90% certainty of a rate hike, VIX options activity has been elevated for nearly a week, with the gauge reaching over 18 last Thursday. Meanwhile, S&P 500 swings have remained below 1% for five consecutive days, and S&P options imply only a 0.8% move heading into Wednesday’s meeting—an unusually low expectation for a Fed event.
Brent Kochuba of SpotGamma offered another interpretation, suggesting the trader might be exploiting the wide gap between the VIX index and futures, which is near its highest level since June. “You can own that super deep in-the-money put against a long call and long future position,” Kochuba said, noting that as long as the VIX remains under 110, the trader can lock in the price difference between the option and the future.
Fascinating context on the spread between VIX spot and futures. The arbitrage angle is definitely worth watching post-Fed.
Wait, buying puts because VIX is at 17 but strikes are 110 and 130? I need to re-read the options math here.
Deep ITM puts usually hedge short calls, not predict a crash. This looks like classic risk management, not a bearish bet.