A highly unusual options trade occurred on the Cboe VIX Index on Tuesday, with a trader purchasing $6 million worth of deep in-the-money puts just before the Federal Reserve's anticipated rate decision. Specifically, the trader bought 563 110-strike VIX puts expiring October 21 for $5.1 million and $1.2 million of 130-strike puts expiring November 18, coinciding with the release of the next FOMC minutes. These trades stood out not only for their size but also because there was no open interest in these strikes prior to Tuesday, and the VIX closed the session at 17.2, making the strikes extremely deep in-the-money [1].
The deep in-the-money puts, with high delta, suggest a strong conviction that volatility will decline over the next two months. The breakeven on the 110-strike puts is just over $19, and for the 130-strike puts, $110 each, indicating a significant premium paid. However, most traders interviewed believe these are unlikely to be standalone positions, speculating that the buyer may be hedging other exposures, such as being short VIX calls or managing risk from other volatility products [1].
This trade comes amid above-average VIX options volume for nearly a week, with the VIX reaching just over 18 last Thursday. Despite this, S&P 500 swings have remained below one percent for five consecutive days, even as the VIX stays above 16, which typically implies a one percent daily move. S&P 500 options are currently implying a move of only 0.8% at expiry on Wednesday, which is unusually low for a Fed meeting. The gap between the VIX index and futures is also near its highest since June, suggesting a disconnect in how market participants are pricing near-term risk [1].
Analysts such as Noel Smith of Convex Asset Management and Brent Kochuba of SpotGamma suggest the trade may be part of a more complex strategy, possibly involving spreads between VIX options and futures, or risk management for other positions. The overall activity highlights uncertainty and divergent views among market-makers and traders regarding volatility and the outcome of the Fed's rate decision [1].
CONCLUSION
The unusual $6 million VIX put trade underscores heightened uncertainty and divergent expectations in the options market ahead of the Federal Reserve's rate decision. While the trade suggests a bet on declining volatility, its true intent remains unclear, reflecting complex positioning and risk management strategies among sophisticated market participants.