Sunday, December 31, 2017

"Betting Against Boredom: A Field Guide to 2018 Volatility Trades"

From Bloomberg Dec. 27:
  • Volatility has been below 10 about 20% of the time this year
  • Global short vol trade has $2 trillion in strategies: Cole
It’s pretty simple: in three decades since the Cboe Volatility Index was invented, 2017 will go down as the least exciting year for stocks on record. There are three trading days left and the VIX’s average level has been 11.11, about 10 percent lower than the next-closest year.
It’s tempting to say nobody thinks it will last, but that would be to ignore the walls of money that remain stacked up in bets that it will. Going just by the sliver represented by listed securities, about $2.4 billion is in the short volatility trade as of this month, the most on record. Hundreds of billions more are betting against beta in things like volatility futures.

Still, that doesn’t mean investors are ignoring the possibility of a resurgence, or at least a reversion to the mean. Here’s a look at volatility positioning as it stands now.

Surging Cost of Protection Against VIX Upside
Nervousness about next year is visible in the relative cost of betting on an increase in volatility, which has surged to a peak compared with wagers on a decline. (The spread is based on three-month VIX skew in data compiled by Bloomberg.) Someone, somewhere is spending money to capitalize on a rebound in the gauge.

But it’s the furthest thing from a one-way bet. The global short volatility trade currently has more than $2 trillion in various strategies, according to an October report by Christopher Cole, the founder of Artemis Capital Advisers hedge fund. He compared the strategy of betting that volatility, already near record lows, will fall even further, to a snake “blind to the fact that it is devouring its own body.”
Reptilian autosarcophagy aside, as of December 2017, betting against volatility has been the trade that worked. An analysis on the website Tuesday said that seven of the 20 worst-performing exchange-traded securities this year were long VIX and other volatility measures.

Investors see a 74 percent probability that equity price swings will widen next year as the current levels of volatility are “unsustainable,” according to a survey of 229 investors representing $6 trillion in managed assets conducted by Absolute Strategy Research. The VIX rose for a second day to 10.25 on Tuesday after hanging below 10 for about 20 percent of the time this year.

Record Number of Investors See Stocks as Overvalued
Between rising corporate profits, a pick-up in global growth and laudable message-management by central banks, volatility has had few catalysts. But as the S&P 500 Index has reached 62 all-time highs this year, a record number of investors see stocks as overvalued, according to a Bank of America Merrill Lynch survey last month.

Perhaps as a result, smart-beta exchange-traded funds purporting to offer a haven from chaos have taken in more than $3.5 billion in 2017....MORE
Previous visits with Mr. Cole and Artemis; as noted in the intro to May 18's "VIX Surge Is Unwelcome Lesson in Duplicity of Volatility Wagers"--UPDATED:

FT Alphaville's Izabella Kaminska used to talk with Chris Cole of Artemis Capital about volatility but I haven't seen him mentioned in a while. What he's up to is on a whole different level from the usual. Here's an example: The shadow convexity risk in the machine (and the VIX)
Or 2014's "An Awful Lot of People Are Shorting Volatility (VIX; VXX; XVIX; XXV)":
I'm starting to wonder if Izabella likes posting on volatility because, in addition to talking to Chris Cole who is pretty sharp, the ETP symbols read like Roman numerals?

As to the headline, I mean "awful lot" in both the colloquial and the literal....
But, instead of listing our links to FTAV, you can go directly to the source:
site: Chris Cole
More recently, both August's link to "'Volatility and the Prisoners Dilemma'—CBOE Risk Management Conference Asia, December 1, 2015" and October 19's "Volatility and the Alchemy of Risk" are worth a read to help get the bigger picture.
And while I attempt to synthesize these concepts, here's a 1992 Mack Daddy beat:

From The Mercenary Trader:
Baby Got Black (Swan)
(With apologies to Sir Mix-a-Lot)
I like… fat… tails and I cannot lie
You vol sellers can’t deny
When a hot trend breaks with a well-timed stop
and a great big black swan pop you get
Paid… P&L year gets made
‘Cause you noticed that trade was packed
Buncha mean reversion suckers got jacked

Oh baby I wanna get lumpy
Long gamma for when it gets bumpy
Central banks tried to haze me,
But those carry trades just don’t faze me!...MORE
Genius or madman?