February 2, 2018 / 9:34 PM / in 4 months

'VIX elephant' rides volatility wave to erase hedging losses

NEW YORK (Reuters) - An unnamed trader dubbed the “VIX elephant,” who for months has prepared for a spike in equity market volatility, adjusted a massive options position as stock prices plunged on Friday, thereby erasing months’ worth of hedging losses.

FILE PHOTO: A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S. December 28, 2016. REUTERS/Andrew Kelly/File Photo

The CBOE Volatility Index .VIX, better known as the VIX, is the most widely followed barometer of expected near-term volatility for the S&P 500 Index .SPX. It rose more than four points to 17.86, its highest since November 2016.

For one trader, whose VIX options position was in the hole by as much as $35 million as of early January, the market rout provided a serendipitous opportunity to capitalize on the higher volatility to erase all of those losses.

On Friday, in one trade, more than 2 million VIX options changed hands as a position with an expiration on February 14 was closed and a fresh position was opened for contracts expiring on March 21.

VIX options are primarily used to protect against a stock market pullback.

“He had something expiring in February and would have probably rolled it around this time anyway,” said Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors in New York.

“The VIX spiking gives him a little bit of a better opportunity,” said Chintawongvanich, who calls the trader ‘the VIX elephant,’ in an allusion to the enormous size of the options position.

    Rolling refers to the closing of an existing position to replace it with a similar position that is set to expire further out in time, a strategy the trader has used for months.

    The large trade on Friday boosted overall VIX options volume to a record 4 million contracts, about four times the daily average, according to options analytics firm Trade Alert.

    It also accounted for about 6 percent of overall options activity in all U.S. listed options contracts on Friday, per Trade Alert.

    Macro Risk Advisors’ Chintawongvanich estimates that the trader was up about $40 million on the February contracts.

    “He started trading this structure back in July and if you look at his profit and loss he is now flat,” Chintawongvanich said.

    The trader’s position in the March term stands to profit if volatility continues to spike. The maximum gain will be realized if the VIX settles at 25 at the March expiration.

    Reuters could not determine the overall impact of the volatility spike on the anonymous trader’s trade book.

    Reporting by Saqib Iqbal Ahmed; Editing by Daniel Bases and Chizu Nomiyama

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