Options positions reminiscent of the mystery trader known as “50 Cent” are building up ahead of the “Super Tuesday” U.S. primary elections and other potentially market-moving events.
At least one investor bought a block of 100,000 calls on the CBOE Volatility Index at a price of 49 US cents each on Wednesday morning. The calls would rise in value if increased volatility pushed the VIX up from its present levels.
The trade comes after similar purchases of some 400,000 February and March VIX calls made in recent sessions, Christopher Murphy, co-head of derivatives at Susquehanna Financial Group, wrote in a research note.
The moves resemble past purchases by an enigmatic investor some market participants have dubbed “50 Cent,” who is known for buying large blocks of VIX options at prices near 50 US cents.
“When you see trades around 50 cents in big blocks – 25,000, 50,000, 100,000 – people think of that historical trader,” Mr. Murphy said. The unknown trader made such purchases in late 2017 leading up to the February, 2018, sell-off in U.S. stocks, and similar trades have shown up periodically since then.
The block trades come ahead of March 3, when 16 U.S. states and territories hold contests toward determining the Democratic presidential nominee. Super Tuesday results are widely seen as a potential market mover, given that some of the biggest electoral prizes are up for grabs in those contests.
The VIX ended Wednesday’s session at 13.74, down from 19.99 during trading on Jan. 31, when worries over the impact of the coronavirus outbreak lifted the index to its highest level in three months.
The VIX would need to hit 24 to make the calls purchased on Wednesday redeemable, although the price of the calls would generally increase as the index approached that number.
A similar position paid off last month, when at least one investor bought calls expiring in February priced at about 50 cents each in large blocks. Some of those calls were later sold for an estimated profit of about US$7-million on Jan. 31, according to options analytics provider Trade Alert.
March brings other events that also could hold sway over U.S. markets performance, Mr. Murphy said.
China is expected to release trade data for January and February, which could provide a glimpse into the impact of the coronavirus outbreak. The Organization of the Petroleum Exporting Countries, which is weighing further curbs on output, is scheduled to meet on March 5-6.
The calls are not necessarily outright bets on a surge in volatility. They can also be used to offset potential losses from a sharp fall in equity prices.