We May Be Headed For Another ‘Volatility Event’
Jesse Felder | Apr 17, 2019 03:23PM ET
There are a number of factors that make the current mania in risk assets unique. Most notable may be the breadth of extreme overvaluation not just within the equity market but across a number of other asset classes. The incredible reach for yield we have seen, driven by the lowest interest rates in 5,000 years, has played out in everything from junk bonds and dividend-paying stocks to real estate and MLPs.
Perhaps the most notable of all the rampant risk taking in the name of generating yield has been the widespread selling of insurance. Here I mean selling credit default swaps, or I wrote a couple of years ago , this thing has gotten completely out of hand.
Just over a year ago, we saw the biggest short vol ETF implode in a matter of hours. Many thought this was the death knell for the broader short vol trade but it appears those rumors were greatly exaggerated. These traders are back and trading bigger than ever. The chart below plots the net position of non-commercial traders in VIX futures as a percent of open interest. There current short position makes that seen in early-2018 look minuscule.
We can also look to the volatility ETFs to try to get a picture of where this trade currently stands. Interestingly, since VXX went away at the end of January and was replaced by VXXB. Barclays (LON:Barclays), which manages the ETF has not released details regarding the short interest in the fund. Still, we can look to TVIX, the second most popular VIX ETF by assets. Here, the message is the same as short interest recently surged to record highs far beyond what was seen prior to the XIV evisceration.
In all, it looks like traders have become extremely complacent in picking up pennies in front of steamroller once again. And rather than just purchase a straight up short vol ETF like XIV they are shorting a 2x vol ETF, enhancing both their leverage and their total risk. What’s more, their extreme positioning may be the only catalyst needed to call the steamroller back to finish the job.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.