Warning! Options Traders Are Betting on a U.S Stock Crash
1min read Professional options traders are hedging against a market crash as demand for deep out-of-the-money VIX calls surges.
Mandy Xu of cboe global markets shared with MarketWatch on Monday that demand for deep out-of-the-money (OTM) call options tied to the Cboe Volatility Index (VIX), surged last week.
The options market is dominated by professional traders, who are betting on a potential sharp spike in VIX. These investors are willing to take relatively low-cost positions in exchange for potentially high returns, a typical hedging strategy against a market crash.
The term deep out-of-the-money (Deep OTM) refers to options where the strike price is significantly distant from the current price of the underlying asset. Data indicates that demand for deeply OTM VIX call options has surged—these options will only become profitable if VIX rises above 50.
According to a Cboe report, last Thursday saw purchases of over 260,000 VIX call options expiring in May with strike prices between 55 and 75, amounting to a total cost of $10.7 million. A Cboe representative noted that this was the second-highest volume day ever recorded for high-strike (50+) VIX call options. Net customer purchases of deeply OTM VIX calls soared to nearly 250,000 contracts, marking the largest one-day transaction volume since May 4, 2023.
FactSet data shows that VIX has not closed above 50 since March 2020. Last Friday, the index settled just below 20, a level consistent with its long-term average. The 20-point threshold is crucial: a VIX reading above 20 indicates heightened market turbulence, while a level below 20 suggests relative market stability.