As many trades focus on the impending September interest rate cuts and their effect on the stock market, some are buying protection against any surprising spikes in the volatility index fund (VIX) ahead of the September 18 Federal Reserve meeting.
Taught by the August 5 experience, which saw VIX spike to 65 and erase billions in the stock market due to a sell-off, a single trader, or more of them, bought 350,000 contracts of VIX 22/30 call spreads that expire on September 18, with a price of $0.25 each.
If the VIX spikes above its current reading of 15.64 to somewhere between 22 and 30, indicating higher volatility until September 18, the trader(s) will profit.
Picks for you
What could cause the spike in VIX?
A week from September 2 to September 6 could prove quite testing for the volatility index with a reading of almost 16 during September 2 as an interlude, the August ISM Manufacturing PMI data, July JOLTs Job Openings data, August ADP Nonfarm Employment data, Initial Jobless Claims data, and August Jobs Report are all scheduled to be released this week. A worse reading than expected in any of those could send ripples through the stock market.
The August Jobs Report will be of particular attention, as the July report came in worse than expected, causing a massive sell-off that saw billions leave the stock market on August 5, as the same scenario could potentially repeat in September.
Furthermore, the European Central Bank and the Bank of Canada are scheduled to deliver their verdicts on interest rates on September 12 and 4, further tuning the market sentiment towards the Fed’s September 18 decision.
History could also play a large role in stock market performance in September
September has been historically weak for the stock market, as it usually offers a negative return during this month.
Also, due to rising trading activity among investors as they return from holidays, volatility surges, usually bringing a 2% swing in either direction, further clarifying the VIX options bought by traders.
With 2024 being a U.S. presidential election year, November 5 stays in the minds of investors, as they prefer to play it safe in case of any unexpected events
If the VIX reaches 22 before September 18, the trader’s potential earnings could range from tens to hundreds of millions, depending on how the index behaves and how market conditions evolve.
Buy stocks now with eToro – trusted and advanced investment platform
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
