It's possible, of course, but unlikely, I think... People have been talking about this one and examining it closely, so it's hard to imagine that everyone got it backwards.
If it's for a real money account, it baffles me even more... Someone like an infamous "Fiddy", who just buys teenies as a hedge, I understand that. But this thing just looks like a punt, rather than a hedge. At any rate, they probably know what they're doing, all these people...
And that's why the guy sold more than 500k of 25 calls for 0.45? According to some (conservative) estimates I've seen out there, it would be reasonable to expect a 1 - 1.5 move in the VIX for every 1% selloff in the Spooz. You can do the math to see what our hero's PNL might look like on this trade on a day like that certain day 30 years ago.
OK so he doesn't wake up screaming and bouncing off the walls, just a little spooked by a nightmare... It's not THAT unreasonable to bet any VIX spike this autumn would be contained below 40, is it? Is he allowed to dynamically hedge?
With VIX sitting at 25 he'd need to buy roughly 12,000 VIX futures to hedge right? And up to 25k roughly in total eventually if it keeps going. Given the availability of close proxies (S&P futs/options etc) he shouldn't find himself with a supertanker position in small pond. I dunno maybe I misread it though...
Not that unreasonable at all, just a little cute to imagine that one could forecast how hard VIX can bounce if we have a proper sh1tshow, while also being certain that it can't stay where it is today. It's a very bigly bet that resembles a call fly in terms of its payoff, but is a lot more "greedy", since it's funded by selling wings. As to the delta, obviously, it would depend on when things happen, but, to pick a date roughly halfway between now and expiry, say, early September. If the Oct futures are trading at 25, he's got arnd 25% delta, i.e. he'd need to buy arnd 65k futures to hedge. At 30, his delta is arnd 60%, i.e. short 156k futures. Similarly, at 10 his delta is arnd 75%, i.e. long 195k futures. Average OI on the most liquid VIX futures contract seems to live arnd 200k nowadays.