Rogue Trader Bets $11 Million On Market Meltdown…

| February 15, 2013 | 0 Comments

Wall Street conspiracy theorists are working overtime this week…

What has them all stirred up?

In case you haven’t heard, an anonymous trader just made a huge bet on a “market event” happening within the next two months.   In a rather unusual trade, the unknown investor made an $11 million bet that the Volatility Index (VIX) would jump over 20 by April 2013.

Let me explain the details…

As you may know, the VIX is commonly known as the “fear gauge” for the stock market.  Whenever the VIX is low, investors are more or less comfortable with the current market environment.

But when something worrisome pops up, big investors will start buying S&P 500 index put options to protect their portfolios.  Since the VIX tracks S&P 500 index put option activity, it rises when investors become more fearful of the market.

Now, back to that massive trade…

To put it simply, the trader who made this huge gamble is betting investors freak out by mid-April 2013.

According to multiple sources, the rogue trader bought a VIX 20 x 25 bull call spread.  In other words, he or she bought the April 20 calls and sold the 25 calls.  The net debit of the trade cost the trader a cool $11 million.

But here’s the deal… 

With the VIX currently trading at 12.6, the index will have to jump dramatically over the next few weeks for the bet to pay off.  Otherwise, our mystery trader will start losing millions of dollars with each passing week.

Take a look…

Volatility Index

To make such an enormous bet, one would have to be extremely confident in a big market shock hitting the headlines soon.

And that’s why conspiracy theorists are jumping all over it…

Is this mystery trader privy to information everybody else isn’t?  Is something really bad going to happen in the next two months?  Remember, if the VIX explodes to 20, the stock market will see a hefty drop in the not-so-distant future.

So what could this trader know that we don’t?

Of course this is all pure speculation, but here are two frightening scenarios…

The Middle-East nuclear standoff takes a turn for the worse:  A recent Washington Post article revealed Iran is trying to buy thousands of highly specialized magnets for their nuclear program.  According to the article, the ring-shaped magnets are banned from export to Iran due to United Nations (UN) resolutions.  Obviously, the magnet ban isn’t keeping Iran from trying to get their hands on the technology.

The fact that Iran wants them so badly is a clear sign they’re furthering their nuclear development goals.  In fact, the U.N. reports Iran is still working feverishly at their burgeoning nuclear program.

Could word have leaked of a looming attack on Iran?

Another flare up in the European debt crisis:  Borrowing costs for Italy and Spain have dropped dramatically over the past six months… a very good sign.  However, anybody claiming Europe’s pesky debt problems are completely solved is jumping to conclusions.  Italy and Spain, along with other highly indebted European nations, have a lot of work to do before the “all clear” sign can truly be given.

Could Europe be on the verge of another meltdown?

Remember, these scenarios are extremely unlikely to occur within the next few weeks, if ever.  But with our mystery trader making such an enormous directional bet on volatility, one has to wonder.

Are you interested in following in this rogue trader’s footsteps?

Although I wouldn’t recommend it, there are simple ways to make a similar trade.  The iPath S&P 500 VIX Short Term Futures ETN (VXX) tracks the VIX and can be easily bought and sold intraday- just like a stock.

If the VIX jumps higher like our fearless mystery trader predicts, VXX will follow.

Until Next Time,

Justin Bennett

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Category: Stocks

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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