With VIX at its 2nd lowest level weekly close in history, amid storms, quakes, dismal data, oh yeah and nuclear armageddon looming, it is perhaps no surprise that speculators sold more VIX futures last week… to a new record level of shorts…
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,â€Â 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.â€
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,â€Â said Omprakash.
In fact, it seems that only FX options traders are seeing through the bullshit…
Which is interesting since, while the Dollar Index just completed its best 2-week rally since December…
Speculators remain at their most short the Dollar (in aggregate across FX Futures) since early 2013…
And finally, as speculators have never been more levered long of the US equity market, so households are loading up on US Stocks.
