VIX call buyer betting on volatility explosion to 45 very soon

this is part of some large volatility hedge. This morning just before 10 a.m. EDT, a very large trade occurred ref in options traded on the CBOE Volatility Index (VIX) where an investor bought 49,000 of the September 45 calls. Paying 50 cents for each, or $50 per contract, resulted in a net debit on the trade of $2.45 million. Why would someone spend that kind of money looking for a double in the VIX in only 41 days to September expiration?

There are several possibilities and the most benign might be that this is part of some large volatility hedge. An institution may have exposure to certain other volatility trades and this could give them some relief if those transactions go against them. But with such a short time frame in this trade, it is more likely that someone is taking a flier on the not-so-remote possibility that the next month could see a volatility explosion.

To provide an idea of how dramatic such a move would be, let’s see what the Probability Calculator has to say. Since there is likely a significantly greater chance of the VIX going back up to 40 than down to 10, just based on the nature of the S&P 500 on which the “fear index” is based, we will adjust the inputs somewhat to give us a more realistic reading. In this case, we input the current level of the VIX as 28 and then target prices of 20 on the downside and 40 on the upside. This way, with a natural bias to the upside built in to our calculation, we ref can get a truer reading of what the chances are for the VIX to get above 40.