Wall Street traders "chickened out"? Spending $9 million to make protective deployments for potential market sell-offs in September

As many Wall Street traders prepare to take a break over the Labor Day long weekend, at least one investor is making protective moves by selling off the market for September.

According to the Wise Finance app, one or more options traders have purchased call spreads on the Chicago Board Options Exchange Volatility Index (VIX) expiring in September, spending over $9 million. This trade aims to protect against the risk of the VIX index surging from its current level slightly above 15 to above 22. If the VIX index rises to 22, it would return to the level on August 9 when the market had just recovered from a sharp sell-off.

Investors have reasons to be cautious about a market downturn. September is typically a weaker month for the S&P 500 index, and this year, with the U.S. presidential election approaching, this month may be particularly volatile. Ahead of the Fed's interest rate decision on September 18, a series of economic data releases could alter market expectations for the extent and pace of Fed monetary policy easing.

Christopher Jacobson, Co-Head of Derivatives Strategy at Susquehanna International Group, said, "With short-term implied volatility significantly decreasing from its peak in early August, investors may view this spread trade as a low-cost hedge against a significant spike in short-term volatility again. Next week's non-farm payroll report and the Fed meeting on September 18 could be catalysts for driving volatility higher, especially during historically weaker seasonal return periods."

Approximately 350,000 VIX 22/30 call spread options contracts are set to expire on September 18, with a trading price of around $0.25 per contract. Some trades are small, while others are large. If the VIX index jumps above 22, the trade will profit, but the gains will be capped when the VIX reaches 30.

Before the Fed meeting, there are many events that could "spook" investors. The Bank of Canada and the European Central Bank will make interest rate decisions early in the month. Domestically in the U.S., presidential debates could impact market sentiment, while U.S. consumer inflation and job reports will provide further insight into the U.S. economic conditions before the Fed's decision.

Daniel Kirsch, Options Director at Piper Sandler, stated that this trade could be hedging against many events next month, including non-farm payroll data, the first debate, Consumer Price Index (CPI), and several central bank meetings