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For months investors have been taking stabs at capitalizing on potential upside in the VIX, but every time the market looks like it might sell-off the VIX makes a new low.   We’ve been quick to report on the massive surges in VIX buying in recent months and have seen these trades routinely fail.  Well, traders are finally starting to make big bets on the opposite side of the trade now.  Bloomberg reports:

Trading of options on the benchmark index for U.S. equity derivatives surged to a record in a bet that the so-called VIX may decline in the next two months.

“It looks like they’re trying to short the VIX in January and February,” said Dan Deming, a VIX options trader at Stutland Equities LLC in Chicago. “They’re selling the call spreads, so that would indicate they think it’s going to be under pressure.”

More than 634,000 calls to buy futures on the VIX, as the Chicago Board Options Exchange Volatility Index is known, traded today, six times the four-week average. Eighty-seven percent of those contracts changed hands as part of two spread trades, according to data compiled by Bloomberg. The calls were probably sold, meaning the traders who initiated the transaction were betting the VIX would decline, Deming said.

CBOE also said VIX options volume reached a record monthly total of 4.16 million in November, a daily average of 208,119.

With these large traders now taking the opposite side of this trade you have to wonder whether this isn’t a good contrarian sign for the markets going forward.  Is this a sign of the bears throwing in the towel or simply a rational bet on the 2010 recovery trade?

IS VIX SELLING A CONTRARIAN SIGN?10.0101