A striking options trade has emerged in the VIX panic index market, with an investor spending $6 million on deeply in-the-money put options just one day before the Federal Reserve's highly anticipated rate announcement. The transaction, executed around 10 a.m. Chicago time on Tuesday, involved the purchase of 563 VIX put contracts at a strike price of 110 expiring on October 21, costing $5.1 million, alongside an additional $1.2 million spent on VIX puts with a strike of 130 and a November 18 expiration date — a date that notably coincides with the scheduled release of the FOMC meeting minutes.
The premium on this trade significantly exceeded any other single transaction on that day, but what makes it even more unusual is the extreme in-the-money nature of the options. Prior to Tuesday, these contracts had no open interest whatsoever, and the VIX closed at just 17.2. Deep in-the-money puts carry a very high delta value, implying a strong probability of finishing in the money at expiration, which signals a high degree of conviction from the trader that the VIX is headed lower.
On the surface, this appears to be a bet on declining market volatility over the next two months. The put options at the 110 strike cost $91 per contract, while the 130-strike puts ran $110 each, putting the combined trade's breakeven point slightly above the 19 mark. However, this calculation assumes these are independent positions — a scenario most traders I spoke with consider highly unlikely. Opinion varies widely on what accompanying positions the trader might hold.
Noel Smith, founder and chief investment officer of Convexity Asset Management, shared his perspective in a phone interview: "If someone is heavily short call options, they could purchase these puts alongside futures to hedge the risk. There are traders buying small VIX call options for 10 cents that could deliver a hundredfold return if the VIX spikes to 20. But the sellers of those calls, while achieving their desired trade economics, are left with tail-risk exposure on their books that needs to be managed."
When piecing together this peculiar trade with other unusual activity across VIX options, VIX futures, and S&P 500 options, a clearer picture emerges: despite bond markets pricing in a 90% probability of a Fed rate hike, volatility product market makers and large institutional traders appear sharply divided on their assessment of near-term market scenarios. VIX options volume has consistently exceeded its average over the past week, with the index briefly pushing above 18 last Thursday.
Yet even with the VIX holding above the 16 level — which corresponds to an average daily S&P move of 1% — the actual realized volatility of the S&P 500 over the past five trading sessions has remained under 1%. Meanwhile, S&P 500 options pricing implies a mere 0.8% market move for Wednesday's Fed meeting expiration, a level that is unusually low for a central bank decision date. If measured against S&P options and recent market performance, the VIX appears to be trading rich relative to its fundamentals.
Adding to the intrigue, the spread between the VIX spot index and VIX futures at Tuesday's close reached its widest point since June. Brent Kochuba of SpotGamma offers one interpretation: this puzzling put purchase could be an attempt to exploit the price differential between VIX options and the underlying futures. "You could hold this deep in-the-money put, layered with long call options and long futures positions," Kochuba explained. "As long as the VIX remains below 110, you can lock in the price spread between the options and the futures."