As last week ended, VIX was crushed back near record lows to ensure the S&P 500 closed above 2500 and to prove all is well in the world - despite quakes, storms, floods, nukes, and worst of all... Fed balance sheet unwind plans.
And VIX speculators have never been more short (implicitly levered long stocks)...
So why, given all this exuberance and complacency, is uncertainty around VIX's future trajectory at relative record highs?
As Bloomberg notes, renewed bets for swings in the CBOE Volatility Index have pushed the CBOE VVIX Index to a new peak relative to the VIX.
Since the ratio between the two gauges hit a record on Aug. 9, the VIX posted moves of more than 20 percent on four separate days, including a 44 percent surge on Aug. 10.
At the same time, exchange-traded products that benefit from market calm just had their biggest weekly outflows on record, while those that gain with greater stock swings gathered more money.
As Reuters reports, the long stretch of low volatility for U.S. stocks has made betting on continued calm a popular and lucrative trade, but traders and strategists warn that risks to the trade have mounted, while the potential for profits has shrunk.
Some traders, however, have grown more wary of increased risks to the trade.
“I think a lot of folks have gotten lulled into a false sense of security because the short trade has gone so well for so long,” said Matt Thompson co-head of Volatility Group at Typhon Capital LLC, in Chicago.
“We are still shorting volatility but we have an itchier trigger finger.”
Assets under management for the top two short volatility products is at $2.8 billion and their exposure to volatility is at an all-time high, according to Barclays Capital. But the very popularity of the trade has cranked up the risk.
And of course, we all know who ends up wearing it at the end...
Positioning in these products, primarily driven by retail players, may be more skewed to the short side than the broader market where institutional investors hold sway.
“I don’t think the risk is necessarily as big on the institutional side as it is on the retail side,” said Omprakash.
In fact, it seems that only FX options traders are seeing through the bullshit...