A mystery trader just made a massive bet that the stock market will go crazy

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bane the dark knight rises

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Sometimes things have to get a little crazy for traders to make money.

50 Cent has some competition.

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That's right, there's another volatility vigilante making bets on increased stock market price swings, and he's going bigger than the recently-unmasked 50 Cent ever has.

The mystery trader is making a massive bet that the CBOE Volatility Index - or VIX - will surge from its near-record low levels.

It's a risky wager. The so-called S&P 500 fear gauge has made a habit out of rebuffing bullish VIX traders in 2017, falling 24% year-to-date and staying locked near its lowest levels on record.

Let's unpack the trade:

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  • In order to fund it, the investor sold 262,000 VIX puts expiring in October, with a strike price of 12.5.
  • The trader then used those proceeds to buy a VIX 1x2 call spread - which involves buying 262,000 October contracts with a strike price of 15, and selling 524,000 October contracts with a strike price of 25.
  • For reference, bullish call spreads are used when a moderate rise in the underlying asset is expected. Traders buy call options at a specific strike price, while also selling the same number of calls of the same asset and expiration date but at a higher strike.
  • In an absolutely perfect scenario, where the VIX hits but doesn't exceed 25 before October expiration, the trader would make a whopping $262 million.
  • Since the trader used a call spread, it is possible for the VIX to spike too much. If it increases beyond 35.2, then the investor will start to lose money, even though they got the direction of the trade correct.
  • For context, the VIX closed at 9.58 on Thursday.

There are a couple potential explanations for the trade. The first is that the trader simply decided that the prolonged low-volatility environment will to end in the next two months. While it seems like it could stretch on forever, even the longest stretches of subdued price swings have eventually given way to fluctuations.

It's also possible that the investor is betting on volatility around some key upcoming events. The trade's October expiration will capture two Federal Reserve meetings, as well as the deadline for the government's debt ceiling decision. The central bank is expected to start unwinding its massive balance sheet by year-end.

The wager flies in the face of one of the market's most popular - not to mention crowded - trades: shorting volatility. Even a slight increase in the VIX could cause those investors holding volatility short to close their positions, which could push the gauge further in the mystery trader's favor.

Still, while hedge fund managers have bemoaned the risk the short-volatility trade presents to the market, especially since so many investors are using leveraged products, there's no denying it's been a good way to profit in a market that's been sitting essentially motionless.

Only time will tell if the trader ends up being correct. And regardless of what happens, you have to respect the person's willingness to shell out big bucks.

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Eat your heart out, 50 Cent.