Wall Street Outlook: Wall Street Week Ahead: Bets Against Stock Market Volatility Return As Summer Approaches
Assets of the ProShares Short VIX Short-Term Futures ETF, a popular vehicle for betting against stock market fluctuations, have nearly doubled in the past six months to $ 562 million.
Investors have also reaped big gains by betting on products designed to take advantage of market volatility.
Short sellers targeting the Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN recorded paper profits of $ 319 million, or 48%, making VXX one of the most profitable short ETFs this year, according to S3 Partners data up to May 14.
Betting against volatility was a popular strategy in the calm trading months leading up to the pandemic, until markets crashed and volatility increased as COVID-19 spread around the world.
Over a year later, “people are slowly coming back to it,” said Michael Purves, managing director of Tallbacken Capital.
Volatility has declined steadily as the S&P has climbed 90% since its March 2020 nadir, with the Cboe volatility index, known as the Wall Street fear gauge, now sitting near a low. 15 months.
Several factors are fueling investors’ bets that market fluctuations will remain contained. The Federal Reserve has doubled down on its pledge to maintain an unprecedented monetary stimulus despite a recent surge in inflation, while President Joe Biden’s administration is pushing billions more to stimulate the economy.
Meanwhile, events that could trigger big moves in the market – such as last year’s presidential election and the Georgia Senate run-off on January 5, are now in the rearview mirror.
“There aren’t a lot of events on the schedule,” Purves said of Tallbacken. “Show me a giant volatility catalyst over there.”
A nationwide vaccine rollout has also lowered coronavirus infections and helped fuel economic reopening and rebounding growth.
Next week, investors will keep an eye on Friday’s non-farm payrolls for clues on the progress of the economic recovery and the pace of inflation.
Last month’s report showed that US job growth unexpectedly slowed in April, possibly dampened by labor and raw material shortages.
Traders have also shown increased interest in writing stock options, both crush and underwrite – strategies that rely on calm markets, said Christopher Murphy, Co-Director of Derivatives Strategy at Susquehanna Financial Group. .
“Volumes dried up this week leading up to Memorial Day weekend, and we are seeing major indices trading within tighter ranges and a noticeable selling trend in summer volatility,” he said. , referring to the volume of shares and options.
Admittedly, betting against volatility can be a risky strategy.
A notable explosion occurred in February 2018, when a sharp drop in equities triggered several short-volatility exchange-traded commodities, including the VelocityShares Daily Inverse VIX short-term (XIV) exchange-traded note (XIV), which lost nearly 2 billions of dollars.
Many of the world’s biggest banks have also said trading could be more turbulent in the coming months as US growth is expected to peak, with Goldman Sachs, Morgan Stanley and Deutsche Bank among those forecasting headwinds.
Seth Golden, chief market strategist at investment research firm Finom Group, which shorted shares of the ProShares Ultra VIX Short Term Futures ETF last year, has reduced its position in recent weeks over concerns that the Fed can send a hawkish message when the world’s central bankers meet. at the Jackson Hole Economic Symposium in August.
“Come on then I think the opportunity to bypass volatility would be ideal,” he said.
Others, however, believe the time to bet against volatility has already arrived.
“We’re in this mid-stage where volatility is low compared to what it has been for the past six months, but it could drop a lot more,” said Jay Wolberg, founder of Trading Volatility, a data provider. and analysis focused on volatility trading. traded products and financial derivatives.
The $ 9 million Switchback Dynamic Volatility Fund 1, actively managed by Wolberg, fell to a net short of volatility in mid-May, after growing concerns about rising inflation caused a slight pullback actions.