With the heavy central-planning boot of repression on the neck of any and all realized risky asset volatility, it is perhaps no surprise that investors, professional and amateur alike, have been dragged into the latest yield-enhancing 'scheme' of being short front-month vol and earning the premium. Bernanke has created a world of insurance providers - who are fundamentally under-capitalized when the big one hits - as record high levels of net short positions, record volumes, and extreme beta to stocks leave the bevy of option premium sellers still consistently picking up nickels in front of that steam-roller. Of course, as Taleb reminds [5], suppressing volatility actually makes the world a less predictable and more dangerous place - though for now, it seems, everyone and their eTrade baby is willing to follow Kevin Henry down the vol-premium selling route until of course that steam-roller tears more than just an arm off (given the massive and levered exposure to this market now). Instead of equity 'Buy-and-Hold'; the new normal is 'Sell Vol-and-Roll.
VIX futures and options monthly average volumes are exploding...
[6]
As daily volumes surge to record levels currently - especially in the front-month...
[7]
As the madding crowd shifts their attention to selling front-month vol as the most consistent and profitable strategy
[8]
And with both spot VIX and the front-month future now extremely high beta to stocks, what could go wrong for these levered net longs?
[9]
Perhaps a re-read (as we just reminded of Minsky's stability leads to instability' idea [10]) of Taleb's beief FA article is worth while...
Nassim N. Taleb — The Black Swan of Cairo [11] by cairowire [12]