As VIX Nears Record Low, Investors Have Never Been More Worried About What Happens Next

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...


rex-lacrymarum karenm Mon, 09/25/2017 - 19:14 Permalink

Markets make no sustainable moves on "news". That is just an attempt at rationalization of something that is beyond rational explanation. It has actually happened once that Bloomberg headlines on two consecutive days cited the same reason as being responsible for the stock market rising on one day, and falling on the next (the "reason" cited on both occasions was "a higher oil price"). Taking your example, let us say the "bombs fall". There have been numerous historical instances of the market weakening as political tensions increased and rallying the very minute the first shot was fired. Statistically it is actually more likely for the market to rise than to decline when the bombs are let loose.But let us for argument's sake say that the market is surprised by an outbreak of war. In that case it would likely decline as the news become known; but if this happens in a bull market, the decline will be completely reversed within a day or two. In a bear market, news of a peace treaty can easily be followed by a crash, but that wouldn't mean the news "caused" the crash, just as news of war - or of anything else for that matter - don't cause lasting trend reversals (we can probably make an exception for news of extinction-level events, such as a 30 mile long asteroid colliding with earth). An interesting idea in this context is that the cause-effect vector quite likely runs in the other direction: the same thing that causes the market to move up or down also causes all other news produced by human activity. In other words, when people are in a bad mood, they sell stocks and go to war. When they are in a good mood, they buy stocks, throw parties and love each other. 

In reply to by karenm

Cosmicserpent Mon, 09/25/2017 - 15:26 Permalink

I'm tired of these recycled "articles".  This place, back in the day, used to have original insight instead of rehashed chicken little bullshit every, goddamnd day. Fucking tools.