Traders Bet on Fear Index Doubling in Three Months

Traders Bet on Fear Index Doubling in Three Months Better than expected employment data has awakened Wall Street's main fear gauge, after weeks of relative calm in the market. A trader believes this is just the beginning of a new round of turbulence.

On Thursday morning, an investor bet that the Chicago Board Options Exchange Volatility Index (VIX) will soar above 45 by mid-October, more than triple its closing level on Wednesday. This trader purchased around 83,000 VIX call options expiring on October 18th for approximately $4.5 million, while simultaneously selling around 27,700 VIX call options with a strike price of 27 and the same expiration date to offset the cost.

This trade indicates that investors are betting on a return of market volatility after it stabilized in early summer following the pandemic-induced market crash in April. The VIX index hit its lowest level since January 2020 at 12.91 on June 22nd.

On Thursday, the index jumped 2 points to 16.16. With the US stock market experiencing a sharp decline on Thursday, fueled by signs of resilience in the labor market and speculation on the Fed becoming more aggressive in fighting inflation, traders anticipate an end to the market's upward trend in the first half of 2023 as the full impact of the Fed's tightening policy continues to affect the economy and the risk of significantly higher inflation than the 2% target remains.

As of 11 am EDT on Thursday, VIX call options with an expiration date of October 18th and a strike price of 45 were one of the most actively traded six contracts on the US exchanges. 

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