Volatility has ramped up in the U.S. stock market recently, as concerns over a possible trade war with the U.S. and China resurfaced. The Cboe Volatility Index (VIX) -- commonly referred to as the market's "fear gauge" -- has surged nearly 59% since its early June lows, last seen at 17.87, and is pacing for its biggest monthly gain since February.
Amid this spike, the 20-day buy-to-open (BTO) call/put ratio jumped to 4.98 back on June 13 -- its highest mark since Jan. 12 -- due to a 50:1 single-day call/put volume ratio that day, according to Schaeffer's Quantitative Analyst Chris Prybal. More recently, the BTO ratio was seen at 2.48.
Drilling down on that June 13 VIX options activity indicates a pair of volatility traders are expecting VIX to stage another late-summer breakout. Specifically, the two top VIX trades two weeks ago were 50,000-contract blocks of August 28 and 47.50 calls, though they appear to be unrelated.
Data from the Chicago Board Options Exchange confirms buy-to-open activity. The lower-strike calls went off at 18 cents apiece, while the higher-strike calls changed hands at 49 cents each, making the respective initial cash outlays $900,000 and $2.45 million (number of contracts * premium paid * 100 shares per contract).
While these options trades could be at the hands of speculators becoming more bullish in their volatility bets, spot VIX hasn't printed north of either strike since the stock market correction in the early half of February. As such, it's possible this is a result of traders hedging against another August volatility spike, with Schaeffer's Senior V.P. of Research Todd Salamone noted about this time last year that "VIX typically hits its year-to-date lows around the middle of July, before bursting higher into the months of August into October."
Supporting this hedging theory is the recent data from the Commitments of Traders (CoT) report, which showed large speculators on VIX futures swung from a net long to a net short position in mid-May. Speculators have held this net short position for six weeks straight.