A mystery trader can't stop betting that the stock market will go crazy

Sure, price swings in the stock market have stayed locked near the lowest on record for the better part of two months. But that hasn't dissuaded one particularly aggressive trader from continuing to bet on a massive shock.

Two months after the volatility vigilante made a humongous wager that the CBOE Volatility Index — or VIX — would surge from its depressed levels by October, the trader has essentially extended that bet into December.

The so-called rollover carries roughly the same maximum potential payout as before: a whopping $263 million.

And considering the trader lost only about $9 million on the wager over the past two months, closing the October trade and pushing it to December allows continued exposure to a huge upside at a relatively small cost, according to a person familiar with the trade.

Still, considering the VIX's propensity to trade near all-time lows, it's a risky bet. The so-called fear gauge has fallen 23% so far this year, and investors continue to pile into the short-volatility trade, which has evolved into one of the market's most crowded positions.

Let's unpack the trade:

To fund it, the investor sold approximately 263,000 VIX puts expiring in December with a strike price of 12.
The trader then used those proceeds to buy a VIX 1x2 call spread, which involves buying 263,000 VIX December calls with a strike price of 15 and selling 526,000 VIX December calls with a strike price of 25.

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

It's also possible the investor is betting on volatility around some key upcoming events. The trade's December expiration will capture two Federal Reserve meetings, as well as a deadline for the government's debt-ceiling decision. There's a 60% chance the central bank will increase its benchmark interest rate by 25 basis points at the December meeting, according to Bloomberg's World Interest Rate Probability data.

While this mystery trader is making waves with large bets, they're not the only person wagering on a VIX spike. The trader known as 50 Cent — recently revealed to be affiliated with Ruffer LLP, a $20 billion investment fund based in London — rose to prominence with repeated bite-sized volatility bets.

Ultimately, a large payday awaits these brave volatility bulls in the event the VIX goes somewhat bonkers. And who knows — if the trade doesn't work this time around, maybe the audacious soul will extend once again.

After all, there's a possible $263 million payout on the line.