Wall Street wary of Volmageddon’s return as concerns grow over trades against equity volatility resurgence.

by
Sharing is Caring!

As the specter of Volmageddon from six years ago still looms large, the latest Bloomberg Markets Live Pulse survey unveils escalating concerns on Wall Street regarding a potential resurgence of trades betting against equity volatility.

In this era of prolonged market calm, strategies aiming to boost returns by selling options have attracted billions of dollars. The unease traces back to the events of February 2018, when an S&P 500 downturn triggered a surge in the Cboe Volatility Index (VIX), measuring expected swings in the benchmark equity gauge.

Though VIX-linked products have diminished, the short-volatility trade persists through various channels, often employing derivatives strategies reliant on stable stocks. Options-selling funds have witnessed their assets doubling to $192 billion in four years, according to Nomura Securities International.

The last time volatility skew was this low was on February 5, 2018, just hours before Volmageddon sent the VIX skyrocketing from 14 to 40. Additionally, a potential surge in the 10-year yield above 4.2% could raise borrowing costs. The urgency is emphasized as U.S. regulators urge Citigroup to make prompt changes in measuring default risk for its trading partners, indicating the potential for a tumultuous market shift reminiscent of Volmageddon.

See also  FCC proposes fining Chinese video doorbell manufacturer after security concerns raised

Sources:

https://www.bloomberg.com/news/articles/2024-02-12/us-stock-market-volatility-bets-trigger-fears-like-volmageddon

See also  Consumer sentiment in Germany weakened significantly in late Q4 2024, signaling growing economic concerns for the ECB.