Mystery Options Trader Places Huge Bet.

[Dinar_o'saurs]

Posted: Wednesday, February 06, 2013 3:29 PM ET ←Link

By: Michael Fowlkes

Whenever we see a large and unusual bet in the market it raises some eyebrows. Typically a large bet indicates that someone knows something, and there was recently just such a bet made on the S&P Volatility Index (VIX).

According to Jim Brown, from OptionInvestor.com, last week there was a huge bet placed on the VIX. Brown spotted an investor buying April 20 calls while selling the same number of April 25 calls for a net of $75 per contract. What is so interesting about the trade is that it was for 150,000 contracts.

The premise behind the trade is that the trade is placing a bet that the VIX will rise to at least above 20, which is a 42% jump above its current trading price of 14.00 over the next 60 days. The amount of contracts that was purchased indicates that this is an $11.25 million bet on the volatility jump.

This raises the obvious question of what could lead an investor to place such a sizable bet on the volatility increase. There are a couple different possibilities.

One could be the possibility of a shrinking GDP during the first quarter. Analysts were stunned to find out that the U.S. economy actually shrank during the fourth quarter by 0.1% for the first time since mid-2009. If we see another dip in GDP during the first quarter, or even any hints that we may, volatility is going to spike.

There is also the issue of budget cuts for the Defense Department, which were supposed to take effect at the end of last year. Congress and President Obama were able to postpone the massive cuts, but they did not eliminate them. A decision was reached to put off any defense cuts until March 1.

Most analysts agree that the automatic cuts, as they are currently scheduled are going to hurt the overall economy, and as we near the March 1 deadline we are going to see increased volatility once the headlines are again focused on their potential impact.

Another reason to believe that volatility will rise is the ongoing hostilities in the Middle East and the heated relationship between the U.S. and North Korea. Relations took a more severe turn earlier this week when North Korea released a video of New York under a nuclear attack. North Korea has recently tested long-range missiles, and is preparing for its third nuclear weapons test.

One final catalyst for higher volatility is the ongoing situation in Europe. Spain has been all over the news lately due to its inability to right its economy, and there is always the possibility that other big European countries will follow suit.

As you can see there are several viable reasons to expect a spike in volatility over the next 60 days. Would I suggest betting over $11 million on it? No, but I don't think our big investor is completely insane for doing so.

[Dinar_o'saurs]

Update.

Fear We Go....

 

SAN FRANCISCO (MarketWatch) -- The CBOE Volatility Index VIX +34.02% jumped Monday as U.S. stocks sold off broadly and concerns rose about political stability in Europe. The so-called "fear index" rose 35% to 19.18 as stocks closed, its largest one-day percentage jump since August 2011. U.S. stocks had their worst day of 2013 with the Dow Jones Industrial Average DJIA -1.55% , S&P 500 Index SPX -1.83% and the Nasdaq Composite Index COMP -1.44% all down nearly 2%.