Massive fear trades emerge betting on rare volatility spike in US stocks

The S&P 500 is little changed on the day, and about 3% below its record closing high.

But fear trades are running rampant.

Shortly after 10:15 a.m. ET, there was an explosion of trading activity in far out-of-the-money options tied to the Cboe Volatility Index (commonly known as the VIX), which tracks the 30-day implied volatility of the S&P 500 based on options prices.

The volumes were centered in VIX call options that expire in May, for the 55, 65, and 75 strikes. The VIX, also known as Wall Street’s “fear gauge,” has rarely eclipsed these levels.

These trades took place on the “ask” side, pointing to a motivated buyer (rather than a seller of these contracts to open).

This activity follows previous big buying of call options tied to US Treasury 10-year note futures in recent sessions, bets that would benefit from the kind of sharp drop in yields that might accompany an increase in perceived recession risk.

“Presumably, this same entity purchased a similar sized position in 10-year future call options back on July 25, 2024. In the following weeks, the fixed income market experienced outsized gains following a very poor employment report, amongst other things, including pricing in an intra-meeting cut by the Federal Reserve,” said Mike Sedacca, portfolio manager at Rareview Capital, who brought this activity to our attention. “This entity likely realized a 10 figure sum on the trade.”