Comment: Misleading and incorrect

(See in situ)

Misleading and incorrect

First of all, for a Wall Street trading desk or a hedge fund this is not a massive bet. $11mm in a trade like this - in which you lose everything if VIX does not reach a level greater than 20 before the April expiration but make double to 6 times your money if it does - is likely someone trying to hedge a long trading book or other long position.

It does seem to be a very confident bet, though. Assuming the position to hedge is $500mm to $700mm, this would protect the holder against a 10% sell-off; however, the cost to do this seems pretty high at a few percent of the book (e.g. you will take a guaranteed +/- 2% loss if the market doesn't sell off, excluding whatever you make on your long position if the market continues to defy financial physics thanks to Bernanke's hot air balloon.

Also, these would not be VIX puts but calls. For those who despise finance and this entire conversation and may not know what this person did:
(S)he paid about $1.25 for the right to "buy" the VIX index prior to April 17 at a price of $20 per "share" on a total size of 15 million shares. (I put "buy"and "share" in quotes because VIX is a computed number based on the price of options... It's all very sophisticated and complicated, so leave all of that up to the "experts".) Anyway, the trader also sold to someone else the right to buy the 15 million shares of VIX at a price of $25 per share before April 17 in exchange for around 50 cents per share... So net, the person paid 1.25 per share for 15mm call options (right to buy at 20) and sold 15mm calls (right to buy at 25) for proceeds of 50 cents per share... 15mm * (1.25-0.5) = $11.25mm. I am using 15 million instead of the stated 150,000 because each option contract conveys the right to buy 100 shares for anyone trying to bridge to the article who is still following.
The VIX is currently at 13.41. If it goes to 20, it will be coupled with a major stock market sell-off (i would say around 10%). If VIX remains below 20, trader loses all his (our) money. If VIX settles above 20, the profit from the trade would be the lesser of 25 or the VIX settlement price minus 20 with the result of this calculation multiplied by 15 million and the reduced by the $11.25mm net price paid for the options.

Happy to clarify further if anyone wants. Don't read too much into this, though. Not that I think the trade is a bad one, the only reason I haven't gone into lock down mode is that I have been bracing for do long without a reckoning... Doesn't mean the reckoning isn't close. It feels a little closer every week.

Stay safe, brothers and sisters in Liberty.

Unlearning and self-teaching since 2008. Thanks, Dr. Paul!