If options traders are correct, stocks are in for a wild ride in February.
Demand for one-month call options tied to the CBOE Volatility Index, a popular gauge of stock-market volatility, has spiked in the past week, a sign that some are bracing for a sharp downturn following the inauguration of President-elect Donald Trump.
In that time, investors have purchased 250,000 VIX call options with a strike price at 21, and another 100,000 with the strike at 22, according to Brian Bier, head of sales and trading at Macro Risk Advisors, an options brokerage. The options cost roughly 49 cents per contract, Bier said.
It would take a massive selloff to make these options profitable, Bier said.
Investors frequently use VIX futures and options as a hedge against volatility. That way, if stocks tank, they can offset some of those losses with the profits from their options trades.
“Even in the current low volatility environment, we’ve seen a lot of people still looking at the VIX as a hedge,” Bier said.