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.
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spot on! and not to mention the derivative set up is such that a host of these market makers are short TONS of upside > $15 VIX….#mindthegap
returns over 2 years can be wiped out in less than 5 minutes of a squeeze….they do not know what they are investing in, fed helped ofc!— Maleeha Bengali (@MaleehaMBCC) February 13, 2024
Last time skew was this low was on Feb 5, 2018, a few hours before Volmageddon sent the VIX from 14 to 40 pic.twitter.com/gQEn8zpXny
— zerohedge (@zerohedge) February 11, 2024
Let me ask you something and I’m serious.
Have you ever seen a market crash from ATHs?
I’d argue the majority of crashes happen near lows. 2-3 days in the end of a route you get some seriously crazy crash like days.
Volmageddon in 2018 is probably as close as it gets. 👇 pic.twitter.com/9agpI4Dp58
— A (@ChiTown_A) February 8, 2024
I’m sure this is fine for the regional banking system. BTFP 2.0 soon. pic.twitter.com/WKkD4mLE4e
— Don Johnson (@DonMiami3) February 13, 2024
U.S. regulators have asked Citigroup for urgent changes to the way it measures default risk of its trading partners, per Reuters
— unusual_whales (@unusual_whales) February 12, 2024