Despite the relative complacency observed in the CBOE Volatility Index (VIX) over the last couple months, some conspicuous trades hit the tape last week that triggered fresh buzz in the options trading community.
The trades stood out not only because of their unusual size, but also due to the price paid for the options in question—50 cents.
A mysterious trader made a name for themself back in 2017, when he or she built a massive upside call position within the VIX. A large number of those trades were priced at $0.50, which earned this unknown trader the nickname “50 Cent.”
As of Feb. 14, it appears 50 Cent is back.
The trader 50 Cent first appeared on the radar back in January 2017, when he or she started buying tens of thousands of upside calls in the VIX. A position that hinged on a sharp spike in market volatility.
Unfortunately, 2017 turned out to be one of the lowest volatility years in the 21st century, which ultimately turned those VIX trades into substantial losers. Back then, several estimates suggested 50 Cent was down somewhere in the neighborhood of $200 million at the end of 2017, when accounting for the total premium lost in VIX options.
Realistically, however, it’s impossible to ascertain 50 Cent’s actual profits or losses from 2017 because nobody knows what positions 50 Cent might have been carrying.
What is known is that 50 Cent’s fortunes abruptly changed in early 2018, when the VIX unexpectedly surged in February. That event is often referred to as “Volmageddon,” due to the associated wipeout in short volatility positions.
The trader purportedly made hundreds millions of dollars on his or her remaining VIX call options during Volmageddon and was instantly transformed into a market legend. The key to 50 Cent’s approach was that he or she continued to buy more VIX calls throughout 2017 and early 2018, despite accumulating substantial losses along the way.
Deja Vu in 2023
This time around, 50 Cent is betting on an increase in market volatility, but the market backdrop—particularly the volatility environment—is completely different.
When 50 Cent was building his or her position back in 2017, market volatility was extremely low—the VIX actually set a new all-time closing low of 9.19 in October 2017. Meaning 50 Cent was making a high-probability bet that volatility—which is historically mean-reverting—would rebound from historic lows.
But in 2023, market volatility is considerably higher.
For the last couple of months, the VIX has been oscillating in a fairly tight range around its long-term average of 19, and is currently trading around 20. At this level, it’s not necessarily a high probability bet that volatility goes up from here. Volatility could go up or down from here, with roughly the same probability.
50 Cent—or whoever is making these trades—obviously holds a different opinion. Starting last week, a slew of trading activity materialized in the VIX options market. Specifically, 100,000 May 50-strike calls traded for $0.50 on Feb. 14.
That pattern persisted throughout the week, as outlined below:
- Feb. 14: 100,000 May 50-strike VIX calls traded for $0.50
- Feb. 15: 50,000 May 50-strike VIX calls traded for $0.51
- Feb. 16: 35,000 May 50-strike VIX calls traded for $0.56
- Feb. 17: 13,000 May 50-strike VIX calls traded for $0.57
The above trading volume totaled nearly 200,000 option contracts—costing more than $10.5 million in premium—over the course of four trading days. A net position that doesn’t pay out unless the VIX rallies above roughly 50.60 before the close of trading on May 17.
For context, the VIX hasn’t traded above 50 since April 2020, when the initial wave of COVID-19 was spreading across the globe.
Right now, even a 40-print in the VIX seems like a stretch. Last year, the outbreak of war in Eastern Europe failed to push the VIX above 40, which is why that particular barrier currently feels like it’s cast in steel.
Reinforcing that barrier is the following statistic—the last eight times the VIX rallied above 30, it failed to break through 40. And now there’s a whale out there betting the VIX will spike above 50 at some point between now and May 17.
Looking beyond the VIX position, one has to keep in mind that nobody knows what else might be in 50 Cent’s portfolio. It’s entirely possible, for example, that 50 Cent has massively long equities, and is using this VIX position as a hedge against a catastrophic correction in the stock market.
Alternatively, 50 Cent could be massively short options in single-stocks and/or ETFs, and is using the VIX position as a hedge against that short volatility exposure.
The only real certainty at this point is that trading volumes in upside VIX calls spiked conspicuously last week, and that the activity shared some similarities with the pattern observed five years ago.
If it is the same trader, it’s highly likely that additional volume will hit the tape in the coming weeks. At least that was 50 Cent’s modus operandi the last time around.
Back in 2017-2018, 50 Cent withstood an immense amount of pressure—and a 13-month wait—to punch a ticket that is estimated to have been worth hundreds of millions of dollars in net profit.
If that trader is back, and playing a potential spike in market volatility in 2023, then he or she will likely be testing a famous industry saying for the second time in five years that markets can stay irrational longer than traders can stay solvent— a quote from the 1930s that’s typically credited to John Maynard Keynes.
Five years ago, 50 Cent tapped his or her unfathomably deep pockets to outlast the market’s irrationality, which was an extended period of historically low market volatility. This year, 50 Cent appears to be betting that volatility in the stock market will finally break through a barrier of resistance that’s been in place since 2020.
Right or wrong, that just made the 2023 trading year a lot more interesting.
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Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastylive or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to firstname.lastname@example.org.