(Bloomberg) -- Traders sold short-term VIX call options Tuesday as the biggest S&P 500 slide in 14 months sent the fear gauge to the highest since early November. 

About 1.76 million contracts changed hands a day ahead of February futures expiration, the most since May 2019. More than 479,000 contracts traded in just the 16, 17, 20 and 22 calls expiring Wednesday, just about what trades on an average day for all calls. The S&P 500 slid the most in 14 months after a hotter than expected CPI print quashed hopes that the Federal Reserve will cut interest rates any time soon.

A look under the hood shows that a big chunk of VIX call contracts with a strike price between 15 and 20 were being sold on Tuesday, according to SpotGamma Inc.’s analysis of Cboe Global Markets Inc.’s data. In fact, VIX call selling outnumbered VIX call buying by a multiple of 3, the data show, as traders looked to monetize their VIX call contracts amid a somewhat unexpected jump in the ‘fear gauge.’

For most of the day, the February VIX futures traded above the contract expiring in March, signaling traders anticipate more volatility in the near-term than further out in the future. The front end of the volatility curve flipped back into its normal upward-sloping shape toward the close.

A setup could potentially muddle Wednesday’s expiration of the VIX futures, when the first-month VIX contract becomes the front-month one. 

As the S&P 500 dropped 1.4% on Tuesday, the Cboe VIX Index jumped to 15.85, after closing below the 15 level for 65 consecutive days. 

The hotter-than-expected CPI print rekindled traders’ appetite for protection after hedging demand was mostly muted during the S&P 500’s relentless rally since late October. The so-called put-to-call skew on the Top 50 stocks in the S&P 500 is approaching the level last seen in the first quarter of 2021.

“Volatility has been suppressed with a lot of put selling in the S&P 500 recently, in which case the VIX can be very jumpy,” SpotGamma founder Brent Kochuba said by phone. “We got a taste of that today. There’s going to be a short-term bid in volatility, with people putting out more defensive positions.”

 

 

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